The U.S. Federal Reserve left interest rates on hold Wednesday, unchanged from its forecast that three rate cuts will be needed in 2024.
The central bank's benchmark interest rate remained in the 5.25-5.50% range at the end of its latest policy meeting on Wednesday, its highest level since 2001.
While the Fed maintains its expectation that the rate will need to be cut by 0.75% by the end of this year, the Fed's policy announcement states that the Fed will “lower its target range until it has confidence that inflation will rise.” I don't think that is appropriate.” We are making sustained progress towards 2%. ”
The central bank will need to cut interest rates three times this year, according to nine officials who gave their forecasts on Wednesday. Five officials believe two cuts will be necessary.
The decision to maintain a policy of three interest rate cuts this year (the same number expected in December) was based on the belief that the persistence of inflation data would prompt authorities to reduce the number of rate cuts in 2024. It was received and carried out.
“The overall picture hasn't changed much, which means that inflation is higher than expected in February 2019,” Fed Chairman Jay Powell said at a press conference Wednesday afternoon, referring to the announcement of higher-than-expected inflation rates in January and February. “We are gradually descending, sometimes along a bumpy path.” %. I don't think that story has changed. ”
But the measurements “very broadly” suggested that “we were right to wait until we were more confident.”
He did not say when interest rate cuts would begin, but said the Fed could begin tapering policy restraints “at some point this year.”
Investors were still betting on the first interest rate cut in June, and the odds rose following the Fed's decision on Wednesday, as did the stock market.
But the Fed's outlook for 2025 rate cuts eased slightly in its latest forecast on Wednesday, with officials now expecting to need three more rate cuts next year, up from the four expected in December. .
Officials also raised their inflation forecast for this year to 2.6% from 2.4%. FOMC members still expect inflation to reach 2.2% next year.
“Inflation has eased over the past year but remains high,” the statement reiterated. “The committee continues to pay close attention to the risks.”
Core consumer prices based on the Consumer Price Index rose at an annual rate of 3.8% in February, following an annual increase of 3.9% in January. While these numbers are down from last year's levels of around 5.5%, they are still nearly twice the Fed's 2% inflation target.
But the central consumer spending index, the Fed's preferred inflation measure, showed better progress on the inflation front, rising 2.8% in January after rising 2.9% in December.
“We're not going to overreact to the data from the last two months, and we're not going to ignore it,” Powell said Wednesday.
read more: Impact of Fed interest rate decisions on bank accounts, CDs, loans, and credit cards
The Fed also significantly upgraded its economic outlook for this year, with officials now expecting growth to reach 2.1% in 2024, up from their December forecast of 1.4%.
Officials also said the job market, although cooling, continues to show signs of strength, and consumer spending continues, albeit at a slower pace, so this year's unemployment rate is lower than previously expected. We expect it to decline from 4.1% and end at 4%. The statement noted that employment growth “remains strong.”
In addition to raising their growth outlook, officials also raised their forecast for the long-term neutral interest rate, an interest rate that they believe neither promotes nor slows economic growth, to 2.6% from 2.5%.
Separately, Powell spoke at a press conference with central bank officials about strategies for how to slow balance sheet shrinkage, a little-known policy tool the Fed uses to tighten financial conditions. said it was discussed.
Over the past two years, the Fed has released about $1.5 trillion in Treasury and mortgage bonds that it had accumulated in an effort to stimulate the economy in the early days of the pandemic, at a rate of about $100 billion a month. This strategy is known as “quantitative tightening” (QT).
Allowing these bonds to mature would push up long-term interest rates because other investors would have to buy more bonds.
As policymakers discuss slowing capital outflows, they hope to avoid the kind of financial market turmoil that occurred when the Fed last tried to shrink its balance sheet at the end of 2010.
Chairman Powell said the committee did not make a decision Wednesday. But he expects the slowdown to start “fairly soon.”
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