US Federal Reserve authorities have made projections for a solitary interest rate deduction this year, followed by additional reductions in 2025. This approach aligns with their objective to maintain elevated borrowing costs over an extended duration, in order to manage inflation rates. A unanimous decision was taken by the officials to preserve the central federal funds rate at a range of 5.25% to 5.5% – a peak that was initially reached two decades ago in July. The median projection suggests that rate cuts are likely to be restricted to once a year, down from the three times that were anticipated in March. By 2025, they aim to implement four rate reductions, compared to the three initially proposed.
However, opinions among officials about the ideal strategy for borrowing costs varied. The Federal Reserve’s “dot plot” indicated that four members foresaw no rate cuts this year, while seven predicted a single rate reduction, and eight projected two decreases.
On Wednesday, the Federal Open Market Committee revised its post-meeting declaration, highlighting a “modest additional progress towards the committee’s 2% inflation goal” over recent months. The previous declaration had indicated an absence of progress. Furthermore, this adjustment acknowledges the latest data, which demonstrated a slow down in price growth during April and May.
Given the resurgence of price pressures in the first quarter of the year, Federal Reserve authorities have reiterated that interest rates will likely remain well above average for an extended period of time. Data published on Wednesday reaffirmed that the progression towards their 2% inflation target has recommenced, with the fundamental consumer price index, excluding food and energy, increasing by 0.2% in May, and by 3.4% compared to the previous year, marking the slowest rate of growth since 2021.
Anticipating a lowering of rates by the Federal Reserve twice by the end of the year, investors anticipated the first cut to be made no later than September, as per futures contracts. Other nations have initiated reductions in borrowing costs, with the European Central Bank and the Bank of Canada both implementing interest rate cuts the preceding week.
Along with updates for inflation forecasts, Federal Reserve authorities elevated their prediction for core inflation to 2.8%, up from 2.6% in March. Meanwhile, their outlooks concerning economic growth and unemployment rates have remained stable at 2.1% and 4% respectively. Unemployment figures rose to 4% in May.
Authorities have recently boosted their estimates for long-term interest rates, setting the marker at 2.8 per cent instead of the earlier 2.6 per cent predicted in March. This indicates that the likelihood of enduring high interest rates is growing.
Some officials, such as Lorie Logan from the Dallas Federal Reserve, have voiced beliefs that increased borrowing costs may not be as economically debilitating as formerly anticipated. Whereas others, like John Williams from the New York Federal Reserve, argue that the current policy is effectively designed to reduce inflation to achieve the Federal Reserve’s targets.
US Central Bankers are extensively discussing the possibility that the neutral rate, which neither slows nor boosts the economy, has elevated since the advent of the pandemic. An increase in the neutral rate may infer that fiscal policy is less effective in impeding economic progress.
Whilst growth in the US economy is slowing and spending tapering, certain economic aspects are displaying a stronger resistance to high borrowing costs.
In May, non-farm payroll statistics in the US shockingly rose by 272,000, outperforming all predictions by economists surveyed by Bloomberg. Moreover, the growth in average hourly earnings accelerated.
The rate of unemployment, sourced from a different study, rose from 3.9 per cent to 4 per cent, representing the first occasion of this level in more than two years.
The Federal Reserve announced that the plan to reduce its balance sheet size would persist at the slower pace established in May. Starting from this month, the bank will reduce its Treasury securities up to $25 billion monthly, a decrease from the earlier limit of $60 billion. The cap for mortgage-backed securities remains untouched at $35 billion.