Advertisement

bruce-mars-558705-unsplash.jpg

Advertisement Headline

Curabitur vel gravida neque. Sed non imperdiet elit. Maecenas in pretium dolor, sit amet rutrum.

28°C
28°C

The Fed Holds Rates Steady and Predicts Just One Reduction This Year


Federal Reserve officials left interest rates unchanged at their June meeting on Wednesday and predicted that they will cut borrowing costs just once before the end of 2024, taking a cautious approach as they try to avoid declaring a premature victory over inflation.

While the Fed had been expected to leave rates unchanged, its projections for how interest rates may evolve surprised many economists.

When Fed officials last released quarterly economic estimates in March, they anticipated cutting interest rates three times this year. Investors had expected them to revise that outlook somewhat this time, in light of stubborn inflation early in 2024, but the shift to a single cut was more drastic.

Jerome H. Powell, the Fed chair, made clear in a postmeeting news conference that officials were taking a careful and conservative approach after months of bumpy inflation data.

With price increases proving volatile and the job market remaining resilient, policymakers believe they have the wiggle room to hold interest rates steady to make sure they fully stamp out inflation without running too much of a risk to the economy. But the Fed chair also suggested that more rate cuts could be possible depending on economic data.

“Fortunately, we have a strong economy, and we have the ability to approach this question carefully — and we will approach it carefully,” Mr. Powell said. He added that “we’re very much keeping an eye on downside economic risks, should they emerge.”

Fed officials lifted interest rates rapidly between early 2022 and last July to a more-than-two-decade high of 5.3 percent. They have held them there since, hoping that higher borrowing costs will slow consumer and business demand enough to wrestle price increases back to a normal pace.

Initially, the plan went beautifully: Inflation slowed steadily in 2023, so much that Fed officials entered 2024 expecting to cut interest rates substantially. But then price increases proved surprisingly stubborn for a few months — and policymakers had to delay their plans for rate cuts, afraid of lowering borrowing costs too early.

The risk in cutting prematurely is that “we could end up undoing a lot of the good that we’ve done,” Mr. Powell explained on Wednesday.

Now the inflation picture is changing again. Fresh Consumer Price Index data on Wednesday suggested that the early 2024 inflation stickiness was a speed bump rather than a change in the trend: Price increases cooled notably and broadly in May.

Still, it is getting late in the year for the Fed to pull off the three rate cuts that it had expected as recently as March. And Mr. Powell made it clear that officials wanted to see more encouraging inflation reports before they slashed borrowing costs.

“Readings like today’s are a step in the right direction,” he said. “But it’s only one reading. You don’t want to be too motivated by any single data point.”

If officials make only one cut before the end of the year, it will take their policy rate to 5.1 percent. Policymakers gave no clear hint as to when the rate reduction might happen. They meet four more times this year: in July, September, November and December.

For American families, the Fed’s more cautious approach could mean that mortgage rates, credit card rates and auto loan rates remain higher for longer. But Mr. Powell emphasized that inflation, too, is painful for households, and that the Fed’s goal is to crush rapid price increases.

For President Biden, a longer period of high interest rates could spell a less vigorous economy heading into the November election. The White House avoids talking about Fed policy, because the central bank sets interest rates independently so officials can make challenging decisions without bowing to short-term political pressure. But some Democrats in Congress are loudly calling for rate cuts, and incumbent presidents generally prefer lower interest rates.

Mr. Biden has come close to commenting on Fed policy at times, but has avoided putting outright pressure on the Fed.

On the flip side, whichever presidential candidate wins could benefit from a steeper path of rate cuts next year: Even as Fed officials predicted fewer cuts in 2024, they suggested that they could reduce interest rates four times in 2025, up from three previously.

The Fed’s forecasts also showed that officials expect inflation to prove stickier than they previously anticipated in 2024: Overall inflation could end the year at 2.6 percent, they predicted, up from 2.4 percent in their earlier estimate. Mr. Powell suggested that the Fed’s inflation forecasts were “conservative” ones.

He also made it clear that the Fed’s forecasts were not a firm plan. If inflation comes down or if the job market takes an unexpected turn toward weakness, the Fed could react by cutting interest rates.

“We don’t think that it will be appropriate to begin to loosen policy until we’re more confident that inflation is moving down,” Mr. Powell said, or unless there is an “unexpected deterioration” in the labor market.

For now, the economy remains resilient, and the Fed has just one meeting this summer, in July. Few investors expect any movement then.

“I think this leaves rates in a higher-for-longer pattern,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.



Source link

Advertisement

bruce-mars-558705-unsplash.jpg

Advertisement Headline

Curabitur vel gravida neque. Sed non imperdiet elit. Maecenas in pretium dolor, sit amet rutrum.

Disclaimer

It’s about the importance of the case in our view, we may discuss the case with the respective client, and we may allow the respective lawyers to provide their opinion on argued cases. This is an important task. Both over and under-performance of the lawyers can lead to bad laws that will affect the entire society and those who come after them. We must be able to have a critical view of such important and consequential performances and roles in our society.