The US Federal Reserve holds rates steady
The US Federal Reserve kept interest rates steady on Wednesday and postponed the start of rate cuts to potentially December, with officials projecting just one quarter-percentage-point reduction for the year. This adjustment comes as they acknowledge the need for continued efforts to control inflation, despite recent progress.
Fed officials revised their earlier expectations from March of three rate cuts to only one, highlighting “modest further progress” towards the 2% inflation target in their new policy statement. Fed Chair Jerome Powell emphasized a cautious approach to inflation, noting that recent easing in monthly inflation readings isn’t enough to instill confidence in a sustainable return to the 2% target. Powell mentioned that more consistent positive data is needed before considering policy loosening.
Additionally, the Fed increased the estimated long-run or “neutral” rate of interest to 2.8% from 2.6%, reflecting the need for more economic restraint. Projections also show a slightly higher end-of-year inflation rate of 2.6% compared to March’s 2.4%. Despite these developments, the S&P 500 and Nasdaq Composite indices held gains, while the US dollar and Treasury yields remained lower. Traders still anticipate the possibility of the Fed starting its rate-cutting cycle in September, with a second cut by the end of the year.
The US Federal Reserve’s new Summary of Economic Projections indicates a central bank navigating slower inflation against steady economic growth and job creation. The projections suggest the economy will grow at 2.1% this year, with the unemployment rate staying at 4%. The need for higher interest rates over a longer period to curb inflation was also underscored.
The US Federal Reserve had aggressively raised rates in 2022 and 2023 in response to inflation peaking at a 40-year high two years ago. The revised projections and statements reflect a continued, cautious approach to managing inflation while supporting economic growth.
