The Fed unsurprisingly maintained its rates at their level on Wednesday during its meeting, and plans to lower them only once in 2024, in the face of the rebound in inflation at the start of the year, and despite recent more encouraging figures.
The American central bank (Fed) left its main key rate in the range of 5.25% to 5.50% in which it has been since last July, its highest level in more than 20 years.
Fed Chairman Jerome Powell will provide details during the press conference he will hold at 2:30 p.m. (6:30 p.m. GMT).
The high point of the meeting, Federal Reserve officials indicated that on average they plan to cut rates once this year, falling to 5.1% at the end of 2024. Of the 19 members of the Monetary Policy Committee (FOMC), four anticipate no decline, seven see one, and eight expect two.
In mid-March, at the last update, Fed officials anticipated three cuts.
But since then, a rebound in inflation has prompted them to be cautious, to avoid a new surge in prices. The month of April, however, saw a slight improvement.
And in May, inflation slowed to 3.3% over one year compared to 3.4% in April, and even an absence of price increases over one month, according to the CPI inflation index, on which are indexed pensions, and which was published Wednesday morning, just before the resumption of debates at the Fed.
The FOMC thus, in its press release, reported “modest additional progress” towards its 2% inflation objective.
However, Fed officials revised their inflation forecasts upwards for 2024 and 2025, to 2.6% and 2.3%, when they expected 2.4% and 2.2% in March, during the previous forecasts.
The PCE index, a measure favored by the Fed, remained stable in April at 2.7% year-on-year. The May figures will be published at the end of June.
Fed officials “need to see a slowdown over more than a month, showing a sustainable trajectory toward (its target of) 2%, before cutting rates this year,” warned Rubeela Farooqi, chief economist for High Frequency Economics.
On the other hand, the encouraging inflation figures published on Wednesday convinced market participants that the Fed would start lowering rates in September, and not in November, which many of them were still forecasting on Tuesday.
The Fed, on the other hand, confirmed its forecasts for gross domestic product (GDP) growth: 2.1% in 2024 and 2.0% in 2025.
As for the unemployment rate, the forecast remains the same for this year, at 4.0%, but is revised slightly for 2025, to 4.2% compared to 4.1%.
By maintaining its rates at this level, the Fed marks its difference with its European counterpart, the ECB which, on June 6, lowered its key rates for the first time since 2019.
But the Federal Reserve is walking a tightrope. If it starts lowering its rates too late, it risks causing economic activity to slow down too much, which could compromise the healthy health of the American job market.
And this worries the Democratic Party of President Joe Biden, less than five months before the presidential election which will pit him against Republican Donald Trump.
Two elected Democrats in Congress sent a letter to Fed President Jerome Powell on Monday, warning him that “an excessively restrictive monetary policy could endanger the vigorous job market” in the United States.
“By lowering rates now, we ensure that we do not cause unnecessary and harmful economic damage,” write Senator Sheldon Whitehouse and Representative Brendan Boyle in their letter.
The Fed is independent of political power, but its decisions have significant consequences on the American economy. The American Federal Reserve (Fed) kept its rates unchanged, in the range of 5.25 to 5.50%, on Wednesday at at the end of its meeting, and indicated that its officials plan to lower them on average only once this year.
The central bank’s Monetary Policy Committee (FOMC) revised its inflation forecast for 2024 and 2025 upwards to 2.6% and 2.3% and reported “modest further progress” toward the goal of 2% inflation. The growth forecasts for Gross Domestic Product (GDP), however, remain identical to those published in March: 2.1% in 2024 and 2.0% in 2025.
