The Fed had actually indicated three interest rate cuts for 2024. Analysts recently no longer really believed this – now the US Federal Reserve’s new forecast makes it more or less official.
The US Federal Reserve is only hinting at one interest rate cut for the current year – a departure from the three interest rate hikes previously forecast. Everyone agrees that further action will depend on the data, said Fed Chairman Jerome Powell.
Previously, the central bank of the world’s largest economy had left the key interest rate in the range of 5.25 to 5.5 percent for the seventh time in a row in the fight against high consumer prices. At the same time, the Fed published new economic estimates – and slightly increased its inflation forecasts. The central bank, however, left the economic forecast for the USA at the March level.
Currently, seven monetary authorities are expecting only one interest rate hike, eight are expecting two, and four are not expecting any interest rate cuts in 2024. The Fed’s decision-makers are expecting an average key interest rate of 5.1 percent for this year (March: 4.6 percent), which suggests an interest rate hike of 0.25 percentage points. However, Fed Chairman Powell made it clear that this was a forecast and not a firm plan. He said that it could take longer for the Fed to have the confidence it needs to start easing monetary policy. Unlike the Fed, the European Central Bank (ECB) had already initiated the interest rate turnaround last week and lowered the key interest rate by 0.25 percentage points.
“All in all, there is nothing that would rule out a rate cut in September. It all depends on future data,” said Paul Ashworth, analyst at Capital Economics, after the Fed meeting. He also does not rule out two rate cuts this year. Elmar Völker, analyst at LBBW, judged that the “enormously changeable impression” that the US macro data had left in recent weeks was clouding the view of both forecasters and US central bankers. If the pendulum swings towards a reliable resumption of the disinflation trend in the next three months, the option of a rate reversal in September is on the table.
Much will depend on further inflation data. The US Department of Labor initially sent out positive signals hours before the Fed meeting. According to the report, inflation in the US has unexpectedly weakened somewhat. Consumer prices rose by 3.3 percent in May compared to the same month last year. In April, the rate was 3.4 percent. A short time later, however, the Fed provided somewhat more pessimistic figures and slightly raised its inflation forecast. The central bank expects a slightly higher inflation rate in the US this year, averaging 2.6 percent (March: 2.4 percent). For 2025, the Fed expects an inflation rate of 2.3 percent (March: 2.2 percent). Powell called the figures “conservative” estimates.
Central banks raise interest rates to curb demand. If interest rates rise, private individuals and businesses have to spend more on loans – or they borrow less money. Growth decreases, companies cannot pass on higher prices indefinitely – and ideally the inflation rate falls. For the Fed, the fight against high consumer prices is a balancing act. If interest rates are too high, there is a risk of recession. However, the US economy is surprisingly strong despite high interest rates.
Source: Stern
