The most telling phrase about the path of interest rates is the one made by Federal Reserve Chair Jerome Powell after the end of the Federal Open Market Committee (FOMC) meeting, which kept interest rates unchanged on Wednesday.
Powell said at the post-meeting press conference, “While it would be appropriate to cut interest rates at a time when inflation is really falling dramatically, we are talking about two years.”
“Not a single policymaker expects a rate cut this year,” Powell said, adding that he did not think the cut was appropriate.
“Inflation hasn’t really abated. It has not reacted much to our current interest rate increases. We’re going to have to keep doing that.”
It surprised investors the most, who had expected the Fed to cut (interest rates) later this year.
The committee reached its decision not to raise interest rates by consensus of its 12 members, for the first time since March 2022, and after raising it 10 times in a row, all this in order to give the Federal Reserve itself time to monitor the improvement of the economy.
But the committee, chaired by Jerome Powell, indicated in new economic forecasts that the cost of borrowing is likely to rise by another half a percentage point by the end of this year, as the economy is stronger than expected and inflation slowly subsides.
“Keeping the target range (for the interest rate) unchanged at this meeting allows the committee to assess any additional information and its implications for monetary policy,” the committee said in a statement. The Committee reached its decision unanimously.
But U.S. central bank officials have mostly expected to raise the rate again by the end of 2023 to between 5.50 percent and 5.75 percent. One predicted it would reach between 6.00 percent and 6.25 percent. However, two members of the Committee expected the rate to remain at current levels.
This decision sent the New York Stock Exchange tumbling.
Powell said the vast majority of respondents believe that a new rate hike would be necessary this year to bring inflation back to 2 percent. This is what economists expect at the Fed’s next meeting in July.
In contrast, most central bank officials consider that the rate will fall again in 2024 to between 4.25 percent and 4.50 percent.
The Monetary Policy Committee (MPC) raised its forecast for U.S. GDP growth for 2023 to 1 percent, from 0.4 percent in advance in March, while cutting its inflation forecast to 3.2 percent very narrowly from 3.3 percent in March.
The meeting of the Federal Reserve’s MPC began on Tuesday morning, two hours after the publication of the latest inflation figures, which showed a slowdown in the sharp increase in consumer prices in May to 4 percent at an annual pace, from 7.9 percent in the previous month, the lowest since March 2021.
Inflation is now twice as low as in June 2022, when it peaked at 9.1 percent.
But it remains far above the Fed’s 2 percent target of controlling rising prices, though the central bank is beginning to see that target being met.
After increasing interest rates 10 times in a row, to 5 percentage points overall, a number of Fed officials supported the suspension of the policy.
Philip Jefferson, a member of the bank’s board of governors, who was appointed president pending confirmation by the Senate, said this would “allow more data to be monitored before decisions are made on the size” of the increases that are still necessary, AFP reported.
It would also avoid having too much impact on consumption, investment, and, consequently, economic activity. And most importantly, it will allow to avoid deflation.
Another measure of inflation is the Personal Consumption Expenditure Index, which topped its figures for May and which rose again in April to 4.4 percent at an annual pace.
The labor market continues to suffer from labor shortages, although conditions have improved.
Job creation in May was much higher than expected, but the unemployment rate also increased more than expected, to 3.7 percent. Daily registration for unemployment assistance in early June was at its highest level since October 2021.
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