Tuesday, May 21, 2024

The US Federal Reserve is holding interest rates steady for the first time since March 2022


US Federal Reserve officials met this week and are likely to hold off on raising the key interest rate for the first time since March 2022 to avoid triggering a recession despite rising inflation.

“I think we will see a commentary next week,” said Lydia Bozor, an economist at EY, noting that there is “enough support” to achieve this among members of the Federal Reserve’s monetary policy committee.

More recently, Philip Jefferson, a member of the Fed’s Board of Governors and appointed vice chairman, explained, “It makes it possible to monitor more data before making decisions about rate.”

From March 2022, the central bank’s key interest rate will be raised by 5 percentage points to a range of 5 to 5.25 percent.

This could lead to banks raising the cost of loans to households and firms to encourage consumption and investment, reducing pressure on prices.

After 10 consecutive hikes, US central bank officials, who meet on Tuesday and Wednesday, want to wait to monitor its impact on the real economy. Above all, avoid triggering a recession, especially since the spring banking crisis made banks more cautious about lending.

As a result, two-thirds of market players now want rate hikes on hold, according to CME Group forecasts.

The central bank’s decision will be announced in a statement at 14:00 (18:00 GMT) on Wednesday. Afterwards, Foundation President Jerome Powell will hold a press conference.

However, heated debates are expected within the group, and according to EY’s chief economist Gregory Tago, “a unanimous vote in favor of suspension is unlikely to be delivered with many hawks”.

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The US economy is doing much better than expected and prices seem strong enough to keep rising.

Inflation rose again in April to 4.4 percent year over year, according to the Federal Reserve’s preferred personal consumption expenditure index. The release of another gauge, the consumer price index, on Tuesday, the first day of the central bank’s meeting, could lower the rate one way or the other.

In the labor market, labor shortages persist despite improving conditions.

Job creation was stronger than expected in May, but the unemployment rate rose to a better-than-expected 3.7 percent. Weekly claims for unemployment benefits in early June hit their highest level since October 2021.

But keeping interest rates on hold doesn’t mean the job is done. Bozor pointed out that Fed officials will send a message that “this does not signal the end of the tightening policy cycle.”

He added that a new rate hike “is on the table” at the next meeting, scheduled for late July.

The Monetary Policy Committee will also update its forecasts for GDP growth, unemployment and inflation. That will determine how far the price will rise.

Accordingly, KPMG’s Chief Economist Diane Swank expected the “Federal Reserve to reconsider the path to raising interest rates,” expecting “higher rates over the long term.”

Nadia Barnett
Nadia Barnett
"Award-winning beer geek. Extreme coffeeaholic. Introvert. Avid travel specialist. Hipster-friendly communicator."

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