The European Central Bank (ECB) made a move last week, but the Federal Reserve is in no hurry. The US monetary authority has kept interest rates this Wednesday in the range of 5.25%-5.5%, as expected. It is the highest price of money in 23 years and has remained at that level since July of last year due to the persistence of inflation. The members of the central bank have updated their macroeconomic projections and the median of these forecasts points to only a rate cut of 0.25 points until the end of the year, to the range of 5%-5.25%, compared to the three that They were expected in March. The lowering of the price of money is delayed.
The forecasts include those of the members of the Federal Reserve Board and those of the presidents of the regional banks of the Reserve System, including both those who are voting members of the Federal Open Market Committee (FOMC) this year and those who don’t. Opinion is quite divided between those who believe that one or no rate cuts will be necessary and those who expect two or more to be necessary. There are four members who expect rates to remain at the current level; seven that predict a cut of 0.25 points and eight that expect two cuts of 0.25 points. As usual, the author of each forecast is not identified.
The president of the Federal Reserve, Jerome Powell, stressed in the press conference after the meeting that these forecasts do not imply any commitment nor do they even, strictly speaking, imply an action plan. The bank will be prepared to act differently if it deems it necessary.
In any case, the projections have moved since those published in March, when the median still pointed to three cuts of 0.25 points until the end of the year. At that time, a rate cut was expected every quarter starting in June, but that scenario was soon turned into a dead letter with the inflation data for the first quarter.
Now, the next question that arises is what is the timing of the only expected reduction. There is no answer yet. The July meeting is ruled out and there is division over whether the cut can come in September, at the last meeting of the summer. The market sees it as probable and Powell has not ruled it out. “We cannot know what the future holds,” he said. He has insisted that decisions will be made meeting by meeting and that it will depend on the data. By then, price data for three additional months will be known.
The Federal Reserve has been warning for months that it needs to have greater confidence that the economy is steadily moving toward the price stability goal, conventionally set at 2% inflation, before it begins to cut rates. After the last meeting, on May 1, the central bank toughened the message of its statement by pointing out the lack of recent progress in the fight against inflation. Now, he qualifies that phrase and says that there has been “modest” progress.
The problem is that prices behaved quite well in the last part of 2023, so it will be difficult for year-on-year inflation to reduce much in the coming months. “We expect good numbers, but not great numbers,” Powell said.
Inflation at 3.3%
This same Wednesday, the Bureau of Labor Statistics, dependent on the Department of Labor, published the consumer price index for the month of May. Prices did not rise that month, so year-on-year inflation has fallen one tenth, to 3.3%. It is better than expected data, which has caused the stock market’s upward reaction. Although it is not the Federal Reserve’s preferred measure of inflation, the fact that it remains above 3% continues to mark the pace of a restrictive monetary policy. Powell has indicated that it is a step in the right direction, but that it does not by itself generate enough confidence to begin to relax monetary policy. “This dynamic can continue as long as it continues,” he said in another of the phrases with which he tries to go off on a tangent and not commit himself.
Federal Reserve members predicted in March that interest rates would drop 0.75 points through the end of the year, from the current level of 5.25%-5.5%, to 4.625% (that is, in the 4.5%-4.75% band). With the new forecasts, they would remain at 5.00%-5.25%. For 2025, rates are now expected to drop one point, to 4.00%-4.25%, and in 2026 another point, to 3.00-3.25%. Ultimately, what the central bank has done is delay rate cuts. Of the three reductions of 0.25 points previously planned for 2024, in the new roadmap one would remain for 2025 and another for the following year.
In addition, the Fed now places official long-term rates at 2.8%, instead of 2.6% previously. It is an indication that the neutral interest rate, which from a theoretical point of view would neither boost nor hinder the economy, has risen due to the change in economic conditions.
Beyond the rates, the rest of the projections show a somewhat less idyllic scenario than the one drawn in March, but still compatible with a soft landing for the economy. In March, Federal Reserve members involved in the projections pointed to gross domestic product growth of 2.1%, an unemployment rate of 4%, and inflation (as measured by the personal consumption deflator, PCE) across the board. of 2.4% and underlying of 2.6% at the end of the year. Now, the median of the forecasts, which is what is taken as a reference, points to inflation two tenths higher, although growth remains at 2.1% and the unemployment rate at 4% by the end of the year. .
Powell has been asked why he thinks people are not happy with the good economic situation and he has answered that he does not have “the definitive answer.”
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