The Federal Reserve of USA It left its benchmark interest rate unchanged on Wednesday for the second time in its last three meetings, in a sign that it is moderating its fight against the inflation now that inflationary pressures have eased.
However, the US central bank emphasized that it could raise rates again before the end of the year.
The bank decided to leave the reference rate at 5.4%suggesting that it is confident that it can wait to see if the 11 interest rate increases it has applied since March 2022 achieve their goal of taming prices.
Year-over-year consumer inflation fell from a high of 9.1% in June 2022 to 3.7% last month. However, that is still much more than the 2% the institution wants, and its officials made clear Wednesday that they are nowhere near declaring victory over the worst inflation the United States has seen in 40 years.
In addition to forecasting another hike by the end of the year, their projections showed they plan to keep rates high well into 2024. They expect to cut interest rates just twice in 2024, down from the four cuts they had forecast in June.
The bank’s penchant for keeping rates high for an extended period suggests it remains concerned that inflation may not fall fast enough toward its target of 2%.
Rate increases have significantly raised the cost of borrowing for businesses and individuals. By adjusting its interest rate policies, the central bank is trying to guide the US economy into a difficult “soft landing” cooling inflation without triggering a deep recession.
Although inflation has slowed significantly, the labor market and economy have remained resilient, dashing expectations that the Fed’s series of hikes would lead to widespread layoffs and a recession.
The more restrained approach the Federal Reserve is now taking reflects its growing awareness of the risks to the economy of raising interest rates too much. Previously, the bank had focused more on the risks of not doing enough to curb inflation.
The Federal Reserve’s actions show that, although policymakers are approaching a peak in their series of hikes, they intend to keep rates at or near their maximum level for an extended period.
By generating sharply higher interest rates throughout the economy, the Federal Reserve has tried to curb borrowing – for houses, cars, home renovations, business investment and the like – to help ease spending, moderate the pace of growth and stop inflation.
Authorities project a rate of 5.1% at the end of 2024
U.S. Federal Reserve officials hope that after a latest interest rate hike this year, at 5.6%the cost of short-term financing ends in 2024 in 5.1%reflecting fewer rate cuts than they anticipated three months ago.
The forecast is the median of 19 estimates included in the Fed policymakers’ latest quarterly forecast report released Wednesday, along with the central bank’s decision to leave its policy rate unchanged at a range of 5.25%–5.50%.
The slower pace of easing planned for next year goes hand in hand with what policymakers see as uneven progress toward the Federal Reserve’s 2% inflation goal.
Federal Reserve officials now project the personal consumption expenditures price index at 3.3% at the end of the year, compared to the June forecast of a 3.2%. The measurement would drop to 2.5% at the end of next year, unchanged from the June forecast.
Furthermore, they expect inflation to reach 2.2% at the end of 2025, before finally hitting its goal of 2.0% in 2026
The Fed authorities also expect further reductions in the official interest rate, until 3.9% at the end of 2025 – compared to 3.4% that they projected in June – and until 2.9% by the end of 2026.
Overall, the updated projections suggest growing confidence in a scenario of “soft landing” for the economy, in which inflation will cool without a sharp drop in economic growth or a sharp rise in the unemployment rate.
The authorities predict that the GDP of the United States will grow by 2.1% this year, a notable improvement over the growth of 1.0% projected in June, and an expansion of the 1.5% next year. Meanwhile, the unemployment rate, which currently stands at 3.8%reach a maximum of 4.1% in 2024 and to remain there during 2025.
With information from AP and Reuters
Source: Gestion
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