rediff.com

Fed Signals One Rate Cut, Inflation Easing

Share on:

By Rediff Money Desk, Washington   Jun 13, 2024 00:11

The Federal Reserve expects to cut interest rates just once this year, down from a previous forecast of three, as inflation cools but remains elevated.
Fed Signals One Rate Cut, Inflation Easing
Washington, Jun 12 (AP) Federal Reserve officials said on Wednesday that inflation has fallen further toward their target level in recent months but signalled that they expect to cut their benchmark interest rate just once this year.

The policymakers' forecast for one rate cut was down from a previous forecast of three, likely because inflation, despite having cooled in the past two months, remains persistently elevated.

In a statement issued after its two-day meeting, the Fed said the economy is growing at a solid pace, while hiring has “remained strong”.

The officials also noted that in recent months there has been “modest further progress” toward its 2 per cent inflation target. That is a more positive assessment than after the Fed's previous meeting May 1, when the officials said there had been “a lack of further progress" on inflation.

The policymakers, as expected, kept their key rate unchanged at roughly 5.3 per cent. The benchmark rate has remained at that level since July of last year, after the Fed raised it 11 times to try to slow borrowing and spending and cool inflation. Fed rate cuts would, over time, lighten loan costs for consumers, who have faced punishingly high rates for mortgages, auto loans, credit cards and other forms of borrowing.

The officials' rate-cut forecast reflects the individual estimates of 19 policymakers. The Fed said that eight of those officials projected two rate cuts and seven projected one cut. Four said they envisioned no cuts at all this year.

The Fed's updated quarterly projections are by no means fixed in time. The policymakers frequently revise their plans for rate cuts — or hikes — depending on how economic growth and inflation evolve over time.

On Wednesday morning, the government reported that inflation eased in May for a second straight month, a hopeful sign that an acceleration of prices that occurred early this year may have passed. Consumer prices excluding volatile food and energy costs — the closely watched “core” index — rose just 0.2 per cent from April, the smallest rise since October. Measured from a year earlier, core prices climbed 3.4 per cent, the mildest pace in three years.

Though inflation has tumbled from a peak of 9.1 per cent two years ago, it remains too high for the Fed's liking. The policymakers now face the delicate task of keeping rates high enough to slow spending and defeat high inflation without derailing the economy.

The central bank's rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low 4 per cent, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under President Joe Biden. In large part, that's because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.

Inflation had cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing”, whereby it would manage to conquer inflation through rate hikes without causing a recession. But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperiling a soft landing.

In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate. Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought.

Last month, Christopher Waller, an influential member of the Fed's Board of Governors, said he needed to see “several more months of good inflation data” before he would consider supporting rate cuts. Though Waller didn't spell out what would constitute good data, economists think it would have to be core inflation of 0.2 per cent or less each month.

As part of the updated quarterly forecasts the Fed's policymakers issued on Wednesday, they projected that the economy will grow 2.1 per cent this year and 2 per cent in 2025, the same as they had envisioned in March. They expect core inflation to be 2.8 per cent by year's end, according to their preferred gauge, up from a previous forecast of 2.6 per cent. And they project that unemployment will stay at its current 4 per cent rate by the end of this year and edge up to 4.2 per cent by the end of 2025.
DISCLAIMER - This article is from a syndicated feed. The original source is responsible for accuracy, views & content ownership. Views expressed may not reflect those of rediff.com India Limited.

TODAY'S MOST TRADED COMPANIES

  • Company Name
  • Price
  • Volume

More »

Moneywiz Live!