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WASHINGTON – The U.S. Federal Reserve left its key interest rate unchanged Wednesday, opening the door to a rate cut, but its March policy decision is likely to be long-term, even as inflation slows rapidly. he suggested.
In a statement after its two-day meeting, the Fed removed previous references to “additional (rate hikes).”
Rather, the Fed said it believes the risks to its goals of stable inflation and full employment are “moving towards a better balance.”
This language asserts that the central bank, which has been aggressively raising interest rates for 16 months to contain high inflation, is almost certain to have done so and that a rate cut is at least as likely as a rate hike.
But he also signaled that the Fed is in no hurry to cut rates and wants to make sure inflation is contained for the long term before acting.
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“When considering adjustments to the target range for the federal funds rate, (the Fed) will carefully evaluate future data, evolving prospects, and the balance of risks,” the central bank said.
He pointedly added: “[The Fed]does not believe it is appropriate to lower the target range until there is greater confidence that inflation is on a sustained path toward 2%.”
Fed Chairman Jerome Powell said at a news conference that the language was intended to convey that while a March rate cut was not ruled out, it was unlikely.
“The timing (of the first rate cut) is related to gaining confidence that inflation is on a sustainable trajectory to 2%,” Powell said. “I don’t think it’s likely that[Fed officials]will reach that level of confidence by the March meeting. It’s probably not the most likely case.”
Chairman Powell said officials are satisfied that inflation has fallen so quickly over the past six months and are concerned that the Fed’s desired inflation measure, currently at 2.6%, will rise further. He said he did not. But they want to see a longer series of data showing that inflation continues to ease and will not stabilize at current levels.
“It is a very important decision to begin the process of reducing (economic) restraints,” Powell said. “We want to get it right.”
Gus Faucher, chief economist at PNC Financial Services Group, expects the first rate cut to occur in May.
The Fed also raised its economic outlook after a strong fourth quarter, noting that economic activity is “expanding at a solid pace.”
What is the key interest rate?
Wednesday’s decision brings the Fed’s short-term benchmark interest rate to a 23-year high of 5.25-5, following a series of aggressive rate hikes aimed at stemming the nation’s steepest inflation spike in 40 years. It will be left unchanged at .5%. The central bank has kept the federal funds rate unchanged since July as consumer price increases have slowed more dramatically.
By adhering to its fourth consecutive meeting Wednesday, the Federal Reserve said consumers still face rising borrowing costs for credit cards, adjustable-rate mortgages and other loans since the agency began combating inflation in early 2022. This will give further leeway. Still, many Americans, especially the elderly, are buoyed by healthy bank deposit yields after years of meager returns.
Will interest rates be cut?
There is little doubt that a decline in interest rates is underway. In December, the Federal Reserve predicted it would cut interest rates by three quarter points more than expected this year, further prodding the S&P 500, which was already climbing towards a new record on the prospect of a rebound in inflation and lower interest rates. Futures markets currently predict up to six rate cuts.
But when exactly the Fed will start reversing its historic rise in borrowing costs, and how quickly, is a trickier question.
Policymakers are grappling with how to respond to the unusual combination of low inflation and strong economic growth. Moderation in price increases is usually caused by a significant slowdown in consumer demand and economic growth.
Not this time. Economists say pandemic-related product and labor shortages caused a spike in inflation, which has since subsided, stabilizing price increases.
What is the current inflation rate?
In December, the Fed’s preferred inflation measure, the personal consumption expenditures index, rose at an annual rate of 2.6%, down from a high of 7% in summer 2022. This core measure excludes volatile food and energy items, and the Fed is monitoring more closely any future declines in inflation indicators. The rate was 2.9%, the lowest level since March 2021, but still above the authorities’ target of 2%.
The annual rate of wage growth, which contributes to inflation, also fell to 4.3% in the last three months of 2023 from 4.5% in the previous quarter, according to a key indicator of wage growth released on Wednesday.
Is the American economy doing well now?
However, on the other hand, the economy grew at a solid annual rate of 3.3% in the fourth quarter, and at a solid 2.5% in 2023 as a whole. Americans continue to open their wallets to defy soaring prices and borrowing costs, thanks in large part to high paychecks. will increase. Although job growth has gradually slowed, the economy added a robust 216,000 jobs in December.
Many forecasters expect growth to slow to just under 2% this year as households feel the strain of high interest rates, record credit card debt and pandemic-related savings. While this would still be a respectable result, some experts still predict a mild recession.
Chairman Powell said several months ago that even if price increases are modest at the moment, the economy and job market remain strong and the Fed could continue to raise rates at the risk of raising interest rates and pushing up inflation. officials said they are concerned. But Powell said officials now believe a strong economy and lower inflation can coexist in a post-pandemic environment, as supply chains recover and labor supply recovers, slowing price increases.
“We don’t think that’s a problem,” he said.
Some officials also say a strong economy means the Fed can afford to be patient when considering cutting rates. Fed Director Christopher Waller said in a recent speech that central banks should act “systematically and prudently,” adding, “Economic activity and the labor market are in good shape, and inflation has gradually declined to 2%. “I don’t think there’s any reason to act so hastily,” he added. Or we could cut back as quickly as we have in the past,” Waller said.
Is it possible that inflation will rise again?
Barclays is among the economic research firms that say it is too early to declare victory over inflation. Wage growth slowed as a rebound in immigration expanded the available workforce. However, there are signs that growth in labor supply has peaked, which could increase wage pressures again. While a measure released Wednesday showed wage growth slowing, another measure of hourly wage increases increased in December.
Meanwhile, Barclays said there was a risk that the supply chain disruptions that fueled inflation early in the pandemic could be exacerbated again by military conflict in the Red Sea.
But there may also be risks in moving too slowly. Lower inflation means that inflation-adjusted interest rates are more restrictive than the Fed would like, potentially hurting the economy more than necessary to rein in price increases.
And Goldman Sachs economist David Mericle says there are signs that the labor market is becoming unstable.
Government, health care, restaurants and hotels are just a handful of industries that have recently added jobs. Some of these sectors are less sensitive to fluctuations in the economy and interest rates. But they are also unstable.
Chairman Powell acknowledged that delaying rate cuts too long could cause “weakening of economic activity and employment.”
Continue reading below to learn more about interest rates and economics.
Will credit card interest rates go down?
Experts say credit card interest rates are unlikely to fall significantly in the coming months because banks are reluctant to lower them.
Credit card debt is at an all-time high of $1.08 trillion, and delinquency rates are rising. If the economy slows down sharply, delinquencies could be seized as losses by banks.
However, if you have a good credit score, you may be in luck. The credit card market is competitive, and card issuers may offer attractive rates to applicants with high credit scores.
– Medora Lee
How will the Fed’s actions (or inactions) affect the stock market?
Stock prices rose and fell on Wednesday. But in the long run, the prospect of the Federal Reserve finishing raising interest rates has been a boon for the stock market and your 401(k).
Over the past 10 rate hike cycles since 1974, the S&P 500 index has risen an average of 14.3% in the 12 months following the Fed’s last rate hike, according to an analysis by Ryan Detrick, chief market strategist at Carson Group.
message? Investors would very much like to see central banks stop overwhelming investors with interest rate hikes. That may explain why the market has reached record levels in recent weeks.
– Paul Davidson
How do Americans feel about the economy?
The latest Gallup Economic Confidence Index, released Tuesday, showed consumer confidence in the U.S. economy is low but at its highest level in two years.
In a January poll, the Gallup Index, which measures whether people think the U.S. economy is getting better or worse, was -26 on a scale of -100 to +100.
The index hovered around +40 just before the pandemic shutdown in 2020, but plummeted to a low of -58 in June 2022, when inflation reached a historic high. Since then, this indicator has gradually recovered in the months since.
– Daniel de Visse
2024 Federal Reserve Board Meeting
The next Federal Open Market Committee meeting will be held on March 19th and 20th. The committee is a branch of the Federal Reserve that determines monetary policy.
All scheduled Fed meetings in 2024, including this week’s meeting, are listed below.
January 30th to 31st
March 19th-20th
April 30th – May 1st
June 11th-12th
July 30th-31st
September 17th-18th
November 6th-7th
December 17th-18th
– Daniel de Visse
What is the likelihood of a recession in 2024?
According to a recent Wolters Kluwer Blue Chip Economic Indicators survey, forecasters expect economic growth to be 1.6% this year. This kind of growth likely means the Fed has achieved a much-needed “soft landing,” with enough economic restraint to keep inflation under control without causing a recession.
While these results could boost President Joe Biden’s chances of re-election in November, the recession could hit hard. Economists surveyed believe there is a 42% chance of a recession in 2024, still historically high but lower than previously expected.
Stronger-than-expected retail sales over the holidays led several experts to upgrade their forecasts, giving the economy more momentum heading into the current quarter.
– Paul Davidson
What is the current inflation rate?
According to the Labor Department’s Consumer Price Index, overall prices rose 3.4% year-on-year in December. On a monthly basis, expenses increased by 0.3% from November to December, although the past two months were roughly flat.
Inflation is slowing from the 40-year high of 9.1% hit in June 2022, but the path down is steep. If consumer prices decline more slowly, the Fed could keep interest rates high for an extended period of time. The Fed has set an annual inflation target of 2%.
– Paul Davidson
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