The Federal Reserve held interest rates steady on Wednesday and postponed the start of cuts until probably Decemberwith a forecast of a single drop in the cost of credit of a quarter of a percentage point this year, in a context of an increase in what the agency’s authorities believe will be needed to maintain the inflation under control.
The lowering of the prospects for rate cuts by the Federal Reserve, compared to the three reductions of a quarter of a percentage point planned in March, occurs despite the fact that the central bank recognized in its new monetary policy statement a “modest additional progress” towards its 2% inflation target, progress compared to the May 1 text.
The forecasts coincide with an increase to 2.8% of the estimated long-term, or “neutral”, interest rate, from 2.6%, indicating that those responsible for monetary policy have reached the conclusion that the economy needs more containment to end the battle against rising prices.
Recent progress has been slow, and Fed officials now expect a slightly higher inflation rate at the end of the year, from 2.6%in front of 2.4% scheduled in March.
Although rate cuts are now seen as likely to begin later and at a slower pace this year than investors had anticipated, they are seen as The Fed’s policy rate will fall rapidly next year, with reductions of a full percentage point in both 2025 and 2026.
The statement and the new Summary of Economic Projections show a central bank struggling with how to respond to data that many interpret as pointing to weaker inflation – in fact, consumer prices did not rise at all in May on a monthly basis, according to data released on Wednesday – but also to solid growth and job creation.
According to new forecasts, the economy will continue to grow this year by 2.1%, slightly above trenddespite the sluggishness of the first quarter and the fact that the unemployment rate will remain at 4% throughout 2024.
“Recent indicators suggest that economic activity has continued to grow at a solid pace. “Employment gains have remained strong, and the unemployment rate has remained low,” the Fed said in its statement.
After little progress in inflation during the first months of the year, the result was a “dot plot” of interest rate forecasts that implied an almost general upward change in the rates considered necessary to end the battle against inflation. inflation.
The Fed aggressively raised the cost of credit in 2022 and 2023 in response to a spike in inflation that hit a 40-year high about two years ago.
(Reuters)
