The Federal Reserve said today that interest rates will stay steady. However, it also signaled that it would cut rates three times in the coming months while it attempts to deal with inflation and uncertainty abroad.
After two days of meetings, the Federal Open Market Committee, or FOMC – the branch of the Federal Reserve in charge of managing the nation’s money supply – revealed that it continues to pursue policies that will ‘promote its maximum employment mandate while addressing rising prices and the associated challenges for millions of Americans’. Though it left interest rates unchanged, the FOMC is a bit spooked by inflation. With prices soaking up much of everyone’s income and devastating supply chains hampering the post-Covid recovery, it’s no wonder it might be a bit jumpy.
At the US Central Bank’s press conference on April 14, Jerome Powell, the chair of the Federal Reserve (the Fed), emphasized that the central bank is ‘committed to a patient, data-dependent approach’ for interest-rate policy. Although the inflation rate has been accelerating in recent months, Powell stressed that it’s ‘beneficial to see inflation as high as it is now since much of it is transitory, reflecting unusual and temporary factors.’ The Fed’s stated path is governed by the central bank’s dual mandate to pursue maximum employment and price stability. This means a tight or relaxed policy, depending on the circumstances.
As a result, ’forward guidance’ from the Federal Open Market Committee (FOMC), which reveals the Fed’s accommodative stance for now but readiness to adjust interest rates if needed to achieve its policy goals, will be scrutinized by market participants in the interpretation of incoming economic data and communications by the central bankers. Those policy pros will focus on knowing earlier than later about the likely size of rate cuts in the months ahead.
The committee’s decision to keep the Fed’s key interest rate at this level was mainly in line with market expectations, and investors primarily focused on the Fed’s projections for rate increases going forward. In a projection released along with the policy statement, the central bank revised its forecast for economic growth and the upward decrease in unemployment, somewhat offset by more significant concerns about overheating and supply‑chain disturbances.
The expectation of three future rate cuts is the flip side of the Fed’s efforts to walk an economic tightrope between encouraging economic growth and staving off overheating. Lower interest rates might be reasonable for borrowing and investment activity, but they also showcase Fed caution amid lingering uncertainties about the path of the recovery.
Moving forward, any policy shifts from the Federal Reserve to combat inflationary pressures and the lingering issues from global economic uncertainty will depend significantly on the Fed’s continued commitment to remain flexible and data-dependent in its monetary policy. Investors will continue to monitor each upcoming Fed meeting and monthly economic indicators for clues about the Fed’s policy intentions and what it means for financial markets and the US economy in the weeks ahead.
Source: www.cnbc.com March 21, 2024
