Federal Reserve maintains unchanged interest rate, foresees three cuts in 2024

Powell: Labor market is still constrained
Federal Reserve maintains unchanged interest rate, foresees three cuts in 2024
Projected rate cuts are likely to commence in the latter half of 2024

For the third consecutive time, the Federal Reserve (Fed) opted to maintain its main interest rate unchanged on Wednesday, indicating that a future increase in interest rates was probable following a series of rapid rate hikes spanning four decades. The Fed policymakers have also expressed their anticipation of a three-quarters of a point reduction in next year’s benchmark interest rate.

These projected rate cuts, which are likely to commence in the latter half of 2024, reflect the officials’ belief that elevated borrowing rates will still be necessary throughout a significant portion of the upcoming year to further dampen spending and inflation.

“Inflation has eased over the past year but remains elevated,” said in a statement issued after the Fed’s 19-member policy committee met Wednesday. This marked the first time since the onset of inflation spikes in 2021 that the Fed formally acknowledged progress in its fight against the rapid escalation of prices.

The statement also hinted at the possibility that their efforts to reduce interest rates may be concluding, as they evaluate whether any additional hikes are warranted.

Read more: U.S. inflation surges ahead of Federal Reserve’s rate decision

Unchanged benchmark rate

The Federal Reserve maintained its benchmark rate at approximately 5.4 percent, the highest it has been in 22 years. This rate hike has resulted in significantly increased expenses for mortgages, auto loans, business borrowing, and various other credit forms. As a consequence, the housing market has experienced a sharp decline in home sales. Moreover, the purchase of appliances and other high-ticket items typically financed through credit has also witnessed a decline.

To date, the Fed has accomplished what only a few observers believed was possible a year ago: a reduction in inflation without a simultaneous rise in unemployment or a recession, which usually accompany the central bank’s attempts to moderate the economy and rein in inflation. Although inflation still exceeds the Federal Reserve’s target of 2 percent, it has declined at a faster pace than anticipated by Fed officials. This has enabled them to maintain unchanged interest rates while monitoring if the trend of decreasing price increases persists.

Inflation surpassed the target 

At the post-meeting press conference, Fed’s Chair Jerome Powell stated that the Fed has chosen to maintain the current base interest rate. He elaborated by explaining that although the labor market was still constrained, it was on a positive trajectory, and the unemployment rate remained low. Powell acknowledged that while inflation had declined, it still exceeded the target of 2 percent. Additionally, he highlighted that nominal wage growth was decreasing.

Powell said that the Fed has implemented a tightening of monetary policy, and its complete impact has yet to be felt throughout the economy.” 

“We are prepared to tighten policy further if appropriate,” he noted.

In line with the decision, Qatar Central Bank (QCB) maintained the deposit interest rate at 5.75 percent. Similarly, the Central Bank of the UAE (CBUAE) kept the base rate for deposits unchanged at 5.40 percent.

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