Fed announces a pause in interest rate hikes, but not an end to them
The US Federal Reserve (Fed) on Wednesday announced a pause in interest rate hikes, although it warned that it will probably need to approve another increase before the end of the year.
Rates remain in a range of between 5 % and 5.25 %, the highest level since mid-2007, after a streak of ten consecutive hikes to bring down inflation, which last May stood at 4 % year-on-year.
“Looking ahead, almost all Committee participants consider it likely that there will be some additional rate hikes this year to bring inflation towards the 2 %” that the body has targeted, Fed Chairman Jerome Powell said at a press conference.
He explained that after the ten hikes since March 2022, the “destination” of 2% is now “closer and closer” and therefore it is “reasonable, common sense, to go a little slower” to have more time to analyse the effects that monetary policy has on the economy.
Thus, to “determine the degree of additional tightening” that may be decided, the time it takes for monetary policy to have an effect on activity, employment and inflation, as well as the evolution of financial markets, will be taken into account.
Fed to meet again on 25-26 July
The next meeting of the Federal Open Market Committee of the US Federal Reserve will be on 25-26 July and before the end of the year its members will hold three more meetings in September, October and December.
The Fed’s decision came a day after it was announced that the year-on-year rate of inflation fell sharply in May, by nine-tenths of a percentage point to 4%, its lowest level since March 2021.
It was the second sharpest drop in the consumer price index since it began falling eleven months ago.
Despite this, Powell noted, “inflationary pressures remain high and the process of getting inflation back down to 2% is a long way off”.
In its economic forecasts, which the Fed also published today and which are an average of the estimates made by the members of the Committee, they estimate that inflation will continue to moderate this year to 3.2 %, and to 2.5 % in 2024.
Inflation of 2.1% by 2025
It does not expect the desired target to be reached even in 2025, when it estimates inflation at 2.1 %.
On the growth front, the Committee members now expect gross domestic product (GDP) to rise by 1 % this year, six tenths of a percentage point higher than their March forecast.
However, they have reduced the forecast for 2024 by one tenth of a percentage point, when the economy is now expected to grow by 1.1 %, compared with 1.2 % previously. For 2025 it forecasts growth of 1.8 %, one tenth of a percentage point higher than its previous forecast.
On unemployment, it forecasts that the rate, currently at 3.7%, will close the year at 4.1%, compared with the 4.5% it previously estimated, and that it will be at 4.5% in both 2024 and 2025.
In its statement on Thursday, in which it justified maintaining rates while assessing the effects of the hikes so far, the Fed noted that recent indicators “suggest that economic activity has continued to expand at a moderate pace”.
It also considered that job creation remains solid and the unemployment rate has remained low (3.7 % last May), while inflation “remains elevated”.
In addition, he acknowledged that tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation, although “the extent of these effects remains uncertain”. The US banking system, he added, “is sound and resilient”.
Uncertainty among Fed members
The Fed announced its latest quarter-point rate hike on 3 May. As the minutes of the meeting were released, participants mostly expressed uncertainty about the appropriateness of further tightening monetary policy.
Faced with runaway inflation as a result of the covid-19 pandemic and the impact of Russia’s war against Ukraine, the US central bank began raising rates on 17 March 2022. It did so by 25 basis points and raised rates by a further 50 basis points in May.
It then stepped on the accelerator and made four 75 basis point hikes. In December it raised rates by half a point and this year began to slow the pace with three 25 basis point hikes.
The easing of the pace became all the more necessary after the uncertainty unleashed in the banking system by the failure of Silicon Valley Bank (SVB) and Signature Bank and the bailout of First Republic Bank, which the US authorities managed to contain.
