The United States Federal Reserve (The Fed) decided on Wednesday to keep interest rates at a 23-year high for the fifth consecutive meeting, while saying it still plans to make three cuts this year.
The news sent US markets higher, as traders welcomed the central bank’s affirmation that three cuts were likely despite a recent rise in monthly inflation.
The Fed’s unanimous decision to keep the key interest rate between 5.25% and 5.50% allows policymakers to “carefully assess incoming data, the evolving outlook, and the balance of risks,” it said in a statement.
Last year, Fed policy proved successful: inflation declined dramatically from its highest level in decades hit in 2022 towards its long-term target of 2%, while the United States managed to avoid a widely predicted recession thanks to stronger-than-expected economic growth.
However, 2024 is more challenging, with the first two months of data showing a slight rise in the monthly inflation rate – renewing fears that interest rates will have to stay high for longer to control prices.
“Inflation is still too high,” Federal Reserve Chairman Jerome Powell told reporters after the interest rate decision was published.
Also read: US Inflation Data Supports Easing Interest Rates in June 2024
“Continued progress in reducing it is not guaranteed, and the path forward is uncertain.”
However, despite the recent gains, Powell said this year’s inflation data “doesn’t really change the overall story, which is that inflation is moving slowly toward 2 percent.”
Along with the interest rate decision, Fed policymakers also updated their economic outlook on Wednesday, sharply raising their US growth forecast for this year to 2.1%, from 1.4% in December.
Also read: Majority of Equity Markets Strengthen Focus on US Inflation Announcements
Fed officials left their headline inflation projections unchanged, but slightly raised their annual “core” inflation outlook to 2.6 percent.
Federal Open Market Committee (FOMC) members also left their median projection for interest rates at the end of 2024 at midway between 4.50 and 4.75.
This means they still expect a cut of 0.75% points before the end of the year, which would likely translate into three cuts of 0.25% points.
Also read: The Fed records a slight increase in economic activity since January
Futures traders currently assign a probability of more than 70% that the Fed will start cutting interest rates in mid-June, with that figure increasing to more than 85% by the end of July, according to data from CME Group.
Powell also said on Wednesday that the Fed expects it will “fairly quickly” begin to slow the pace of selling assets it acquired to help the economy weather the Covid-19 pandemic.
The move would reduce the likelihood of another liquidity crisis, and could actually allow the Fed to do more in the long term to reduce its bloated balance sheet, Powell said. (AFP/Z-3)
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