Tuesday, May 21, 2024

NewsHorizon

Where your horizon expands every day.

Business

The Federal Reserve maintains current interest rates and strengthens their policy approach as expectations for a smooth economic slowdown increase.


WASHINGTON – The U.S. Federal Reserve held interest rates steady on Wednesday but stiffened a hawkish monetary policy stance that its officials increasingly believe can succeed in lowering inflation without wrecking the economy or leading to large job losses.

The U.S. central bank has released updated quarterly projections, indicating that the Fed’s benchmark overnight interest rate may see another increase this year, reaching a peak range of 5.50%-5.75%. The projections also show that interest rates will remain significantly tighter until 2024, compared to previous expectations.

During a recent press conference, Federal Reserve Chair Jerome Powell stated that individuals have a strong dislike for inflation. He made this statement following a two-day policy meeting where the central bank officials decided to maintain the current benchmark overnight interest rate of 5.25%-5.50%. However, they also outlined a more stringent approach in their efforts to combat inflation, which they believe will continue until at least 2026.

According to Powell, the economy is stable and job growth remains robust, which will enable the central bank to maintain pressure on financial conditions until 2025 without causing significant harm to the economy or labor market, unlike past battles with inflation in the United States.

The economy is projected to keep growing at approximately 1.8% in 2026, with monetary policy maintaining a slightly restrictive stance.

The Fed predicts that inflation will continue to decrease in 2023 and beyond, but they are only planning to make small adjustments to their policy rate. This means that the anticipated half percentage point decrease in rates for 2024 will actually result in an increase in the inflation-adjusted “real” rate.

In June, Federal Reserve officials had anticipated a 1% decrease in interest rates for the upcoming year.

Powell stated that the Federal Reserve can take cautious steps in their future policy decisions. However, he also emphasized that the outcome of the central bank’s efforts to control the severe rise in inflation is still uncertain.

Powell stated that the Federal Reserve has not yet made a decision on whether or not the current interest rates have reached the desired level to return inflation to their target of 2%. They are looking for compelling proof before making a final determination.

Some indicators show that inflation is still more than twice the level desired by the Fed. However, Powell stated that it seems to be decreasing in multiple important areas of the economy.

The latest projections and policy statement from the Fed caused an increase in bond yields, resulting in the 2-year Treasury note reaching a 17-year high of about 5.2%. As a result, major U.S. stock indices experienced a decline.

A WIDER RUNWAY?

Although Powell maintained a strict stance on inflation, there was a shift in tone to acknowledge the growing belief among American central bankers that a desired “soft landing” may be occurring.

Powell is hesitant to label it as the Fed’s “baseline” at this time.

The speaker stated that the path has likely expanded, and they believe it is possible. This is emphasized by projections from Fed policymakers, who expect inflation to decrease despite the growth of gross domestic product and the unemployment rate never exceeding 4.1%. This outcome goes against both U.S. history and the predictions of many prominent economists.

Until recently, even employees of the Federal Reserve expected a recession to occur this year. This is a common result of effectively fighting inflation, which can lead to decreased spending and investment as well as increased unemployment. However, the median GDP forecast for 2023 among policymakers is now 2.1%, which is five times higher than it was at the beginning of the year.

The predicted decrease in the federal funds rate to 5.1% by the end of 2024 and 3.9% by the end of 2025 is expected to cause a decline in the central bank’s primary gauge of inflation to 3.3% by the end of this year. It is then expected to further decrease to 2.5% next year and 2.2% by the end of 2025. The Federal Reserve anticipates achieving their 2% inflation target in 2026, which is later than what some officials had previously thought possible.

Before the Federal Reserve meeting this week, investors were anticipating substantial interest rate reductions in the coming year. However, this expectation has been muddied by projections from 10 out of 19 officials indicating that the policy rate will stay above 5% throughout the next year.

This indicates that both businesses and individuals will experience more stringent credit requirements and increased interest rates, on top of the impact from the Federal Reserve’s intense two-year effort to control inflation. As government bond yields rise, this will affect the rates set by banks for credit cards, car loans, and home mortgages.

If the outcome was hawkish, it was due to the economy’s strong performance. Despite falling inflation, there was minimal impact on employment or economic growth.

According to Olu Sonola, head of U.S. regional economics at Fitch Ratings, the Fed’s recent increase in projected growth and decrease in projected unemployment for 2024 suggests that they anticipate a smooth economic slowdown, despite maintaining higher rates for an extended period of time.

The Federal Reserve’s statement was unanimously approved following a meeting that served as the introduction of newly appointed Fed Governor Adriana Kugler to the central bank’s decision-making process.