Recently it looked as if the Fed was planning three interest rate cuts this year. But price inflation in the USA has accelerated again. It remains unclear when monetary policy will be relaxed.
The Fed has dampened hopes of rapid interest rate cuts this year and expressed concern about stubborn inflation. It could take “longer than previously thought” for the Fed to gain more confidence that high inflation is really on the decline, Fed Chairman Jerome Powell said at a news conference in Washington.
The central bank of the world’s largest economy previously left the key interest rate unchanged at a high level for the sixth time in a row. This means that it is now still in the range of 5.25 to 5.5 percent – the highest level in more than 20 years. Commercial banks can borrow central bank money at this rate. However, Powell made it clear that he believes a rate hike is unlikely.
It now remains unclear how much the Fed will cut interest rates this year. The US Federal Reserve had actually forecast three interest rate cuts of 0.25 percentage points each for this year. In an estimate published in March, the Fed assumed a key interest rate of 4.6 percent on average for 2024. Powell was evasive when asked whether it would stay that way. “I don’t think about it that way.”
Interest rate cut in June off the table for now
If the Fed has enough confidence in the data, it will cut interest rates. But it is unclear how long this will take. It is entirely possible that the USA will have to prepare for a longer period of high interest rates. The Fed will not publish a new interest rate forecast until June.
“An interest rate cut in June is off the table after today’s central bank meeting,” reacted Thomas Gitzel, chief economist at VP Bank. “The choice of words used by the US central bankers suggests that an interest rate cut will be postponed until the second half of the year – at least.”
USA: High inflation persistent
The US stock markets received a boost after the Fed’s interest rate decision – also because there were no serious fears about possible upcoming interest rate increases. Fed Chairman Powell said: “I think it’s unlikely that the next interest rate move will be a hike.” At the same time, the Fed announced that it wanted to slow down the reduction of its balance sheet, which had been bloated by crisis measures during the pandemic.
The Fed – and consumers – are struggling as high inflation in the US proves persistent. The Fed’s 2 percent target currently seems out of reach. According to the Ministry of Labor, consumer prices rose by 3.5 percent in March compared to the same month last year.
Powell said it was his expectation that the inflation rate would fall this year. But due to the data, this confidence has decreased somewhat. The central bank of the world’s largest economy has raised its key interest rate by more than five percentage points at a record pace since March 2022 in the fight against inflation. Recently, however, she stopped turning the interest rate screw.
Source: Stern
