WASHINGTON (AP) — The U.S. Federal Reserve on Wednesday kept its benchmark interest rate unchanged for the second time in its last three meetings, easing efforts to fight inflation as price pressures ease. It is a sign that there is.
Fed policymakers also indicated they expect to raise rates once again this year and expect the key interest rate to remain higher than most analysts expect in 2024.
But as the latest policy meeting concluded, the 19 members of the Fed’s rate-setting committee expressed optimism that they could manage to slow inflation to their 2% goal without triggering a deep recession. I told them that I was strengthening it. Many economists were concerned. This is what economists call a hopeful scenario. “Soft landing.”
With a new set Quarterly forecast, policymakers have indicated they expect higher economic growth and lower unemployment this year and next than they expected just three months ago. They think inflation will continue to slow, even if growth is expected to be strong.
Subhadra Rajappa, Société Générale’s head of interest rate strategy, said the expectations are that Fed officials hope to achieve “moderate disinflation without disrupting the labor market or causing a significant recession.” “This suggests that he feels that he can do what is necessary.” .
US consumer inflation has declined to 3.7% since hitting a high of 9.1% year-on-year in June 2022. Chairman Jerome Powell warned in a press conference on Wednesday that the Fed still wants more confidence from upcoming economic data that inflation is on a sustainable path to its target level. But he suggested the Fed is nearing the end of its rate hike cycle and a soft landing seems “plausible.”
“I think we’re pretty close to where we need to be,” Powell said. “A soft landing is the number one goal. … That’s what we’ve been trying to achieve this whole time.”
The Fed’s latest decision is the result of 11 rate hikes starting in March 2022, keeping the benchmark interest rate at around 5.4%. Powell said these rapid rate hikes have allowed the Fed to take a more cautious approach to interest rate policy.
“We are taking advantage of the fact that we have acted quickly in the past to find a way to reach the appropriate level of limits needed to restore inflation, so we now need to manage interest rates a little more carefully,” he said. ” It goes down to 2%. ”
Fed officials expect to cut rates only two times next year, fewer than the four they expected in June. They forecast that key short-term interest rates will remain at 5.1% at the end of 2024, higher than they were during the Great Recession of 2008-2009 through May of this year.
Still, one reason they likely reduced the expected number of rate cuts in 2024 is a positive one: a recession that would require multiple rate cuts to support the economy is unlikely. That’s because I think so.
“What we have now is still a very strong labor market that is starting to rebalance,” Powell said. “We are making progress on inflation. Growth is strong.”
Fed officials expect one more rate hike this year, but Powell appears to be more hedging than usual about whether a rate hike will be necessary.
“I’m not too sure about rate hikes at this stage,” said Derek Tan, an economist at forecasting firm LH Mayer. “He sounded more vague.”
U.S. Treasury yields soared Wednesday after the Federal Reserve issued a statement after its latest policy meeting and updated its economic outlook.
In new quarterly forecasts, policymakers expect economic growth this year and next to be faster than previously expected. This year’s growth rate is expected to reach 2.1%, an upward revision from the 1% forecast in June, and 1.5% next year, an upward revision from the previous forecast of 1.1%.
Core inflation, which excludes volatile food and energy prices, is considered a good indicator of future trends, but is expected to fall to 3.7% by the end of the year, compared to forecasts as of June. It exceeds 3.9%. Core inflation, based on the Fed’s recommended standards, is currently 4.2%. Policymakers expect the rate to fall to 2.6% by the end of next year, close to the target.
The Fed’s current approach to raising rates reflects a recognition that the risks to the economy from raising rates too high are increasing. Until now, officials have focused on the risks of not doing enough to curb inflation.
As interest rates rise sharply across the economy, the Fed seeks to slow borrowing for things like homes, autos, home improvements, and business investments to ease spending, moderate the pace of growth, and rein in inflation. I’ve been trying.
Although there has been clear progress on inflation, gas prices are rising again, reaching a national average of $3.88 per gallon as of Tuesday. Oil prices have risen more than 12% in the past month.
And the economy remains expanding at a steady pace as Americans continue to spend, supported by steady job growth and rising wages. Both trends could keep inflation and Fed interest rates high enough and for long enough to weaken household and business spending and the overall economy.
Although overall inflation has fallen, the cost of some services, from auto insurance and car repairs to veterinary services and hair salons, is still rising faster than before the pandemic. Still, the latest data points to the direction the Fed wants to see. Inflation in June and July was the highest on record, excluding volatile food and energy prices. Two lowest monthly measurements For the first time in almost two years.
There are also increasing signs that the job market is not as strong as it used to be, which is helping to keep inflation in check.of The pace of employment has slowed.Number of unfilled openings There was a big drop in June and July.. And the number of Americans looking for work has skyrocketed. This improved the balance between labor demand and supply and eased pressure on employers to raise wages to attract and retain workers. This trend could lead to higher prices to offset rising labor costs.
Several factors threaten to reignite inflation, weaken the economy, or both. For example, the price of gasoline has steadily increased due to rising oil prices. If this trend continues, inflation will worsen and consumers will have less money to spend. Even the United Auto Workers union’s so far limited strike against America’s Big Three automakers could ultimately lead to even higher car prices.