In December, the Fed announced interest rate cuts for 2024. But at their first meeting this year it might not be that far.
The US Federal Reserve (Fed) will today announce its decision on the further course of monetary policy. With inflation easing, the Fed is likely to change course this year. Nevertheless, analysts are expecting a further break in interest rates.
Although the central bank had promised interest rate cuts for 2024 at its last meeting last year, the key interest rate remained in a range of 5.25 to 5.5 percent – the highest level in more than 20 years. However, experts are likely to be curious to see what schedule Central Bank Chairman Jerome Powell will set at his press conference.
Fight against inflation
Since March 2022, the Fed has raised its key interest rate by more than five percentage points in the fight against inflation. The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine. With inflation easing, it is expected that the US Federal Reserve could cut interest rates soon.
However, given the robust economic growth, it should not be in any hurry to do so. So far it seems that the Fed has managed to slow down the price increase without slowing down the economy. The latest economic data shows that the US economy grew more than expected in the fall.
Keeping inflation under control is the classic task of central banks. The Fed aims for price stability in the medium term with an inflation rate of 2 percent. It is turning the interest rate screw in the fight against high consumer prices. If interest rates rise, private individuals and businesses have to spend more on loans – or borrow less money. Growth is slowing, companies cannot pass on higher prices indefinitely – and ideally the inflation rate is falling. At the same time, however, there is a risk of a recession. Finding the right balance is the big challenge for central bankers.
Experts: interest rate cut in March at the earliest
Declining inflation now gives the monetary authorities in the USA some leeway. But Fed Chairman Powell has repeatedly emphasized in the past that the data should be viewed with caution and that we have to wait and see whether the decline is permanent. In December, Fed decision-makers expected an average key interest rate of 4.6 percent for this year. That suggests about three rate cuts in 2024.
But experts assume that a first interest rate cut cannot be expected until the next meeting in March at the earliest. The latest economic data should confirm the Fed’s decision to stick to its strict monetary policy for the time being.
Concern about wage growth
The euro currency watchdogs also ended the years of zero and negative interest rates in the summer of 2022 in order to get high inflation under control. The European Central Bank (ECB) raised interest rates. “In the US and the euro area, part of the inflation dynamics is due to the rise in energy and raw material prices,” said International Monetary Fund chief economist Pierre-Olivier Gourinchas at the presentation of the latest economic report on Tuesday. But in the Eurozone this shock was much greater than in the USA. “That leads to a slightly different diagnosis when you think about what might happen in the US in terms of inflation,” Gourinchas continued.
He points out that consumer prices in the USA have risen so dramatically because of high demand and a particularly strong labor market. A strong labor market generally makes it harder for the Fed to fight inflation because it drives up wages. If demand in the US does not decline, inflation could become more persistent, warned Gourinchas. The European Central Bank is more concerned about wage growth and whether wages, which have lagged behind prices, can catch up without causing further price increases.
Source: Stern
