If “more trust”
Interest rate turnaround postponed – Fed remains silent
January 31, 2024, 8:06 p.m
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In the opinion of the central bank, the time has not yet come for the interest rate turnaround expected by many in the USA. At their first meeting of the new year, the monetary authorities are sticking to the current high level of interest rates.
The US Federal Reserve will keep the key interest rate constant even after the turn of the year. It decided to maintain the range of 5.25 to 5.50 percent. This was the fourth time in a row that the central bank paused, having previously raised interest rates in large steps in the fight against inflation. The Fed is likely to turn things around this year and loosen monetary policy if inflation continues to weaken. In December, the monetary authorities around Fed Chairman Jerome Powell envisaged several interest rate cuts for 2024 in their outlook. The current decision was unanimous.
However, the US Federal Reserve formally changed its interest rate outlook, giving itself more scope to cut interest rates in the coming months. In its statement, the Fed said “the risks to achieving employment and inflation goals are moving toward a better equilibrium.” That’s a more neutral description than previous references to the prospect of “additional monetary tightening” that central bankers had maintained since last raising interest rates six months ago.
At the same time, the Fed noted that the change in its outlook does not mean that a rate cut is imminent. “The Council does not consider that a rate cut is appropriate until it has gained greater confidence that inflation is moving sustainably towards two percent,” the statement said. Fed chief Jerome Powell became more specific after the meeting: a cut in March was unlikely, he said after the meeting.
Surprisingly robust US economy
The rapid inflation was triggered, among other things, by the rise in energy prices after the Russian attack on Ukraine. With inflation easing, it is expected that the US Federal Reserve could cut interest rates soon. In December the annual rate was 3.4 percent. The Fed’s rapid interest rate hikes had dampened growth in the largest economy.
Last fall, however, the US economy grew more strongly than expected. In the fourth quarter, the gross domestic product increased by 3.3 percent on an annual basis compared to the previous quarter, as the US government announced about a week ago. Economists were positively surprised. The prospects of avoiding a recession have improved. Given the robust economic growth, the Fed is unlikely to be in any hurry to cut interest rates.
Observers do not expect a rate cut until after the next meeting in March at the earliest. So far it appears that the Fed has managed to slow down price increases without completely slowing down the economy. In December, Fed decision-makers expected an average key interest rate of 4.6 percent for this year. That suggests about three rate cuts in 2024.
However, Fed Chairman Jerome Powell has repeatedly emphasized in the past that the data should be viewed with caution and that we have to wait and see whether the decline is permanent. He fears that if interest rates are cut too quickly, inflation could skyrocket again. Because greater purchasing power could trigger a surge in inflation. This would likely result in rapidly rising consumer prices.