Federal Reserve to cut interest rates three times this year

Strong labor market and decreasing inflation rates support Fed's decision
Federal Reserve to cut interest rates three times this year
Inflation fell to just 2.6 percent in December compared to the previous 12 months

Federal Reserve chair Jerome Powell has reiterated the central bank’s commitment to lowering interest rates three times in 2024. In an interview, Powell provided insights into the Federal Reserve’s outlook, emphasizing the strength of the U.S. economy and the importance of carefully navigating inflation dynamics.

Interest rate cuts

Despite market speculations of a more aggressive approach with six interest rate cuts beginning in March, Powell clarified that the central bank is aiming for a measured reduction in interest rates, starting no earlier than May. The chair’s assurance aligns with the Fed’s December projections, where officials envisioned three interest rate cuts in 2024. Hence, the bank aims to bring the benchmark interest rate to approximately 4.6 percent from its current 23-year high of 5.25-5.5 percent by the year’s end.

Labor market

Powell also expressed confidence in the current state of the U.S. economy, citing the strong labor market which plays a role in interest rate cuts. He highlighted the unexpected addition of 353,000 jobs in the latest non-farm payroll report. Therefore, he emphasized that the labor market is in a healthy balance, dispelling concerns of a recession on the horizon. However, Powell and other Fed officials acknowledged potential challenges arising from a robust labor market, including the possibility of higher wage growth and service prices.

Inflation dynamics

Inflation fell to just 2.6 percent in December compared to the previous 12 months. In the second half of 2023, inflation measured 2 percent which is the Federal Reserve’s target level. Hence, it decreased drastically from its peak of 7.1 percent in the summer of 2022.

In the interview, Powell delved into the factors contributing to the inflation surge in 2021-2022. He attributed it to pandemic-related disruptions in spending patterns and global supply chain constraints. Acknowledging the Fed’s misjudgment in anticipating the duration of inflation, Powell admitted that the central bank should have acted sooner to raise interest rates. Hence, inflation began increasing in mid-2021 yet the Fed didn’t start raising interest rates until March 2022. Despite this acknowledgment, he expressed optimism that inflation would continue to fall over the first half of 2024, driven by the unwinding of supply chain issues and the impact of previous rate hikes.

Read: IMF grants $4.7 billion to Argentina for restoring macroeconomic stability

Caution amid positive economic data

While Powell emphasized the positive trajectory of the U.S. economy, he and other Fed officials remain cautious about the timing of interest rate cuts. The Federal Reserve seeks further evidence that inflation is under control before implementing the planned reductions. Therefore, Powell highlighted the importance of continued positive economic data and the need to carefully assess the evolving situation.

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