Source: AFP
The U.S. Federal Reserve is most likely to keep interest rates unchanged later this week as policymakers grapple with a recent uptick in inflation that has sharply reduced the likelihood of a summer rate cut.
The Fed’s decision to raise interest rates and then keep them at a 23-year high helped to significantly reduce elevated inflation, although it remains firmly stuck above the US central bank’s long-term target of 2%.
Since the start of this year, the Fed’s favored measure of inflation has accelerated, reaching an annual rate of 2.7% in March, while economic growth has slowed and the labor market has remained robust.
The current environment, analysts say, is likely to lead the rate-setting Federal Open Market Committee (FOMC) to keep interest rates at their current level of between 5.25 and 5.50 percent for longer than previously thought. .
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“Another round of elevated inflation data is likely to lead to a more hawkish message at the FOMC meeting in May,” Deutsche Bank economists wrote in a recent note to clients.
Calling back expectations
Source: AFP
At the FOMC’s most recent meeting in March, policymakers cut interest rates by three-quarters of a percentage point this year, although Fed Chairman Jerome Powell also warned that inflation was “still too high.”
The data from the March 20 decision only reinforced that message, prompting policymakers — including Powell — to scale back their optimism about rate cuts.
Fed Governor Christopher Waller told a conference in New York last month that “it is appropriate to reduce the overall number of interest rate cuts or advance them further in the future in response to recent data.”
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Richmond Fed President Tom Barkin, who is a voting member of the FOMC this year, told AFP earlier this month that recent inflation data was not “supportive” of the case for cuts.
And in mid-April, Powell said that recent data “obviously did not give us more confidence and instead indicate that it is likely to take longer than expected to achieve that confidence.”
Markets are almost certain the Fed will leave its key lending rate unchanged this week: Futures traders gave a less than 3% chance on Friday that it would announce a rate cut after its two-day meeting on Wednesday, according to CME Group data.
In light of recent data, traders see no more than a 50% chance of a rate cut by the Fed’s decision in mid-September, according to CME Group.
A cut in September could prove difficult for the Fed as an independent US central bank, coming just before November’s presidential election, which will likely see incumbent Democrat Joe Biden face off against former Republican President Donald Trump.
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Analysts are split on both the size and timing of rate cuts this year, with top economists’ estimates ranging from zero cuts in 2024 to as many as four.
“Persistent inflation and resilient economic activity in the first few months of the year left the FOMC with little reason to ease policy in the near term,” Wells Fargo economists wrote in a recent note to clients.
Time to relax;
Source: AFP
The Fed is not releasing updated economic forecasts this week, so analysts should instead look to public comments by FOMC policymakers in the coming weeks for signs of their thinking about rate cuts.
But it could offer some clarity on Wednesday about its policy of allowing assets it bought to help the US economy deal with the Covid-19 pandemic to “wind down” — or expire without being replaced.
This continued policy reduces the overall size of its balance sheet and is also intended to tighten monetary policy somewhat.
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The Fed, which currently holds about $7.4 trillion in assets, is currently debating when to begin slowing the current rate of outflows, which allows up to $95 billion in assets to mature each month without being replaced.
It will probably be appropriate to slow the pace of the outflow “fairly soon,” Fed Chairman Powell said last month, adding that this would reduce the risk of “liquidity problems” – a possible reference to last year’s banking crisis.
Analysts broadly expect an announcement to come either this week or at the next rate meeting in June.
Source: AFP