Wednesday, May 29, 2024
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The Federal Open Market Committee kept its interest rates steady in a range of 5.25% to 5.5%, a 22-year high, after the end of its two-day meeting. Majority of economists polled had expected the Federal Reserve to pause its interest-rate hikes, though a recent spike in oil prices has raised concerns another hike may lie ahead.

The Federal Reserve however stiffened its hawkish stance, with a further rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected. Fed policymakers at the median still see the central bank’s benchmark overnight interest rate peaking this year in the 5.50%-5.75% range, just a quarter of a percentage point above the current range.

But from there the Fed’s updated quarterly projections show rates falling only half a percentage point in 2024 compared to the full percentage point of cuts anticipated at the meeting in June. With the federal funds rate falling to 5.1% by the end of 2024 and 3.9% by the end of 2025, the central bank’s main measure of inflation is projected to drop to 3.3% by the end of this year, to 2.5% next year and to 2.2% by the end of 2025.

The new projections include a substantial markup of projections for economic growth: After expecting growth as weak as 0.4% for this year in earlier projections, the Fed now sees the economy growing 2.1% in 2023.

The unemployment rate is also seen remaining steady at around 3.8% this year and rising to just 4.1% by year’s end – a vote of confidence in the possibility of containing the worst breakout of inflation since the 1980s without significant job losses.

Market reaction after Fed policy announcement

The U.S. dollar pared losses against a basket of currencies on Wednesday, after the U.S. Federal Reserve held interest rates steady but stiffened its hawkish stance with a further rate increase projected by the end of the year. Interest rate sensitive two-year Treasury yields hit 17-year highs on Wednesday after the Fed decision. Wall Street retreated with the S&P 500 turned negative as the U.S. Federal Reserve held key interest rates unchanged as widely expected, but warned that restrictive policy could remain in place through 2024.

From March 2022 through May 2023 the Fed raised rates at 10 successive meetings – by anywhere from a quarter to three quarters of a point – as it fought the worst rise of inflation since the early 1980s. In June the Fed paused before hiking again in the July meet.

Data since the Fed’s last meeting, while generally supporting the view of slowing inflation alongside continued economic growth, has been somewhat mixed as the pace of headline price increases recently jumped. Price increase pre

pressures have showed signs of persistence.

And signs have grown that the job market isn’t as robust as it had been, which helps keep a check on inflation: The pace of hiring has moderated. The number of unfilled openings fell sharply in June and July. And the number of Americans who have started seeking work has jumped.

“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.,” the US Fed in a statement.

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks,” the Fed said.

This week’s Fed meeting comes as central banks around the world are mostly raising rates to fight inflation, which spiked after the pandemic hampered global supply chains, causing shortages and higher prices. Inflation worsened after Russia’s invasion of Ukraine in February 2022 sent oil and other commodity prices spiking. The Fed leads a week jammed with key central bank meetings, with policy announcements in Sweden, Switzerland, Norway, Britain and Japan all due later this week.

The European Central Bank raised its benchmark rate last week for the 10th time to 4%, the highest level on record since the euro was established in 1999, though it signaled that it could be its last hike.


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