Source: AFP
The U.S. Federal Reserve is widely expected to keep its key interest rate unchanged on Wednesday as policymakers continue discussions on when to begin cutting interest rates and begin the next phase in their long-running fight against inflation.
The Fed raised interest rates to a 23-year high between 5.25% and 5.50% as it tries to steadily bring inflation back to its long-term target of 2%.
After making significant progress against rising prices last year, 2024 has been more challenging, with the US seeing a slight pick-up in the rate of monthly inflation.
At the same time, the unemployment rate remained low, wage growth slowed and economic growth for the final quarter of 2023 was above expectations – all pointing to the US economy remaining in good health despite the higher rates.
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After two days of deliberations, the Fed will release an updated summary of economic projections (SEP) along with its rate decision on Wednesday, which will include policymakers’ views on where they expect interest rates to go at the end of the current year.
“The pace of deflation, the slowdown in employment growth, [is] it’s not happening as fast as we thought it was a few months ago,” Wells Fargo senior economist Michael Pugliese told AFP. “And so they will adjust their policy outlook accordingly.”
From three to two?
Source: AFP
At the December SEP, policymakers advanced three rate cuts for 2024 as the Fed moves to ease monetary policy while continuing to push inflation down toward its long-term target.
The March update released on Wednesday is unlikely to show a major shift, although some analysts see the possibility that policymakers will reduce the number of cuts they expect to see this year.
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Wells Fargo still expects the Fed to make three rate cuts for 2024, Pugliese said. That’s one short of the bank’s own forecast of four rate cuts this year.
But policymakers are more likely to lower their expectations for rate cuts on Wednesday than raise them, he added.
“Looking at the forecasts, we think there is a risk of seeing two rate cuts instead of three,” EY senior economist Lydia Boussour told AFP.
“We have a lot of noise in the inflation data and some upside surprises,” he said. “So there may be some Fed officials who tend to take a bit more of a hawkish stance.”
The path of the cuts is uncertain
In recent weeks, US central bank officials — led by Fed Chairman Jerome Powell — have urged caution about cutting rates too quickly and instead said they would pursue a “data-driven” path.
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“The economic outlook is uncertain and continued progress toward our two percent inflation goal is not assured,” Powell told lawmakers in Washington earlier this month.
He later confirmed that he still expects the cuts to start this year.
Futures traders are currently assigning a roughly 55% chance that the Fed will begin cutting interest rates by June 12, according to CME Group data.
This marks a significant shift from the period before the Fed’s last interest rate decision in January, when traders were still widely expecting the first to come in May.
“We were thinking in May; we moved it back to June,” Cathy Bostancic of Nationwide told AFP. “Even if it’s not June, I think it’s July.”
“I think they’re really going to be willing to stay in that wait mode and wait for more data to actually make that move,” said EY’s Boussour, who also expects the Fed’s first rate cut in June. .
Source: AFP