The Federal Reserve has signaled support for two more rate hikes this year, including one that could be implemented at its next meeting in July, even as it skipped an increase for the first time in more than a year.
At the end of its two-day meeting on Wednesday, the Federal Open Market Committee voted unanimously to forgo another quarter-point rate hike and keep the federal funds rate at its current target range of between 5 percent and 5.25 percent.
But despite the first postponement of the aggressive monetary tightening campaign that began in March 2022, Fed Chairman Jay Powell has made it clear that the US central bank intends to put pressure on the world’s largest economy to bring persistently high inflation under control.
“Almost everyone on the committee thinks it’s likely that some additional rate increases would be appropriate this year,” Powell said in a news conference after the rate decision. He added that he expects the meeting next month to be “live”, which sends a strong hint that the Fed is leaning towards a rate hike on July 26.
Most policymakers expect two more quarter-point increases this year in a move that would raise the benchmark rate to between 5.5 percent and 5.75 percent, according to an updated “point chart” published Wednesday that compiles officials’ projections through to the end. Year 2025.
Despite the Fed’s view that more rate hikes are necessary, Powell defended its decision to hold steady on Wednesday, arguing that it was a “prudent” move given how much the central bank is already trying to dampen economic activity. He said the committee also took into account “potential headwinds” from the recent regional banking crisis.
“This is an awkward place for the Fed because communication is really difficult,” said Michael De Passe of Citadel Securities. “They say there hasn’t been enough progress on inflation, but they also take pauses.”
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Powell said the Fed needs “credible evidence that inflation tops and then starts to fall” before concluding that it has squeezed the economy enough, noting that there has been little progress in reducing core inflation in recent months.
Most officials expect the federal funds rate to fall to 4.6 percent in 2024 and 3.4 percent in 2025, both higher than March estimates, suggesting the Fed intends to keep monetary policy tighter for longer while trying to tame inflation. .
After Powell’s press conference, the yield on two-year Treasury notes, which moves with interest rate expectations, rose to its highest level since mid-March. Traders in the futures market have reduced their bets that the Federal Reserve will cut interest rates this year. US stocks fell, initially falling before recovering.
In March, when the dot chart was last updated, most policymakers predicted that the central bank would not raise interest rates beyond the current level, in large part because of the aftershocks of the failure of Silicon Valley Bank and other lenders.
Since then, the economic picture has been mixed, sparking a fierce debate among Fed officials about whether and when more interest rate hikes are needed. Economists polled by the Financial Times last week expected the central bank to raise interest rates at least twice more this year, to a range of 5.5 per cent to 6 per cent.
The latest Consumer Price Index report, released on Tuesday, showed a slowdown in annual inflation despite persistent price pressures across many sectors of the economy. The job market has lost some momentum but is still very strong, which encouraged consumers to continue spending.
According to forecasts released Wednesday, most officials now expect “core” inflation, based on the PCE price index, to slow to 3.9 percent this year before slowing to 2.6 percent in 2024 and 2.2 percent in 2025. .
This indicates that inflation will decline more slowly than previously forecasted in March, when the median estimate for core personal consumption expenditures in 2023 was 3.6 percent. It currently hovers at 4.7 per cent.
Officials also reported much higher growth this year, with the economy expanding 1 percent. This is much higher than the estimate of 0.4 percent released in March. The unemployment rate is expected to peak at 4.5 percent in 2024, which is slightly lower than the previous forecast of 4.6 percent.
