by Sandip Das on 2 May 2024, 4 min read
The Federal Reserve of the United States decided to maintain interest rates at their current level during their recent meeting, signaling a cautious approach towards potential future reductions in borrowing costs. However, they raised concerns about recent disappointing inflation figures, which might delay any rate cuts for some time.
Jerome Powell, the Chair of the Federal Reserve, acknowledged that the first three months of 2024 saw faster-than-expected price increases. This unexpected trend means that policymakers will require more time than initially anticipated to feel confident that inflation will resume its decline toward the target rate of 2 percent, which had been a source of optimism in the previous year.
While the Fed had been making steady progress toward its inflation target, this progress has now halted. The Federal Reserve Governor Jerome Powell emphasised that while rate hikes are improbable, the current benchmark policy rate, ranging between 5.25 percent and 5.5 percent since July, might be maintained for an extended period.
The Federal Reserve’s stance is based on the belief that the existing policy rate is exerting sufficient pressure on economic activity to rein in inflation. Powell stated that they are willing to wait for as long as necessary for this pressure to manifest results, even if it means enduring a period where inflation remains stagnant or “moves sideways.”
According to Powell, the preferred inflation gauge of the Fed, the personal consumption expenditures price index, surged at a 2.7 percent annual rate in March, marking an acceleration from the previous month. In a post-meeting press conference, Powell expressed concerns about the persistently high inflation rate, stating that further progress in reducing it is not guaranteed, and the future trajectory is uncertain.
Powell maintained his forecast of inflation decreasing over the year but admitted to having lower confidence in that prediction now. The possibility of rate cuts within the year remains uncertain.
Powell highlighted the various scenarios that could influence the Fed’s decision-making process. If inflation proves to be more persistent than anticipated and the labor market remains robust while inflation stagnates, the Fed might delay rate cuts. Conversely, if economic data suggests otherwise, rate cuts could be on the table. Ultimately, the decision will hinge on the evolving economic landscape and the data at hand.
Source: Reuters
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