📷 Image Credits: FXStreet
The US Federal Reserve (Fed) is expected to keep interest rates unchanged after pausing its campaign of rate increases for the first time in more than a year. Following 10 consecutive rate hikes to a range of 5 to 5.25 percent, Fed officials are now predicting the possibility of lifting rates twice more this year. The decision to maintain the current rate comes as the central bank assesses the economy’s response to its actions to combat rapid inflation.
The recent policy statement released by the Fed emphasized the need for time to evaluate the economy’s reaction to the rate hikes, indicating a commitment to bringing inflation back down to the 2 percent target. The updated economic projections from central bankers forecast potential inflation levels of 3.2 percent by the end of 2023, with core inflation estimated at 3.9 percent. These projections underscore the concern over the persistent nature of inflation and its impact on the economy’s growth.
Jerome H. Powell, the Fed chair, highlighted the Fed’s focus on determining the appropriate level of rate increases to slow down the economy effectively. Despite the potential for further rate hikes, Powell suggested that rate cuts are not expected for a couple of years, emphasizing the need to moderate the pace of future rate hikes. The Fed’s economic forecasts also anticipate a rise in the unemployment rate to 4.1 percent by year-end, reflecting the surprising strength of the labor market.
Investors initially reacted with volatility to the Fed’s forecasts for higher interest rates, causing shifts in stock prices and a rise in bond yields. However, Powell’s clarification during the post-meeting news conference emphasized that the forecasts are expectations and not definitive promises. As markets digest the implications of the Fed’s announcement, the S&P 500 remains relatively stable, with minor fluctuations throughout the day. The Treasury yields, although sensitive to interest rate changes, have shown minimal movement, indicating a considered response to the Fed’s signals.
Despite concerns over inflation persistence and the potential for further rate hikes, Powell’s tone during the conference focused on the need for data-driven decisions and the importance of monitoring economic conditions closely. While market reactions to the Fed’s communication may continue to sway sentiment, the central bank remains committed to navigating the delicate balance between addressing inflation concerns and maintaining economic stability.
