Source: AFP
The U.S. Federal Reserve is expected to hold interest rates steady for a sixth consecutive meeting on Wednesday, with a summer start to tapering looking less likely due to persistent inflation.
For months, the U.S. central bank kept its key lending rate at a 23-year high to dampen demand and rein in price rises — with a slowdown in inflation last year fueling optimism that the first cuts were on the horizon.
However, inflation has picked up and analysts widely believe that the Federal Open Market Committee (FOMC) will keep its target range at 5.25% to 5.50%.
As hope for rate cuts in the first half of the year fades, the Fed also faces a growing possibility that potential cuts will coincide with the run-up to November’s presidential election.
That could boost the economy while Democrats and Republicans battle to win over voters. The converging schedule may prove awkward as the Fed, as the independent US central bank, seeks to avoid any appearance of politicization.
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However, for Dan North, senior economist at Allianz Trade North America, there is “no chance” the FOMC will cut or raise interest rates on Wednesday.
Financial markets had been expecting the central bank to begin tapering in June just a few weeks ago, but the latest inflation reports “definitely pushed the withdrawal date substantially further into the future,” North said.
“The September meeting now looks like the most likely time for the first cut,” he added.
‘Uncertainty’
Ryan Sweet, chief US economist at Oxford Economics, said “given the incoming inflation data, the risks are weighted towards fewer cuts this year.”
Sweet predicts two reductions, in September and December.
The Fed’s reliance on incoming data also raises “uncertainty in forecasts of the path of monetary policy,” Sweet added in a recent note.
When Fed Chairman Jerome Powell holds a press conference after the two-day meeting, analysts will scrutinize his comments about progress in reducing inflation — looking for signs that the first tapering has been pushed to September.
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Another issue is Powell’s response to whether the Fed might consider raising rates again, although observers expect the bar to be set very high for such a move.
Balance sheet
Economists also believe the Fed could offer clarity this week on a policy that allows assets it bought to help the U.S. economy deal with the pandemic to “run down,” or expire without being replaced.
The bank allows up to $95 billion in assets to mature each month without being replaced.
It currently holds about $7.4 trillion in assets and is debating when to begin slowing the current rate of outflows.
The ongoing measure reduces the overall size of the Fed’s balance sheet and is also intended to tighten monetary policy.
Powell recently said it would probably be appropriate to slow the rate of runoff “fairly soon.”
He added that this would reduce the risk of “liquidity problems” — a possible reference to last year’s banking crisis.
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Analysts broadly expect an announcement on the runoff to come this week or at the next rate meeting in June.
Source: AFP