As expected, the US Federal Reserve (Fed) is leaving its key interest rate unchanged at a high level for the fifth time in a row. The key interest rate is still in the range of 5.25 to 5.5 percent. However, the inflation rate in the USA is still quite high. Nevertheless, the US Federal Reserve continues to expect interest rate cuts this year.
The key interest rate remains higher than it has been in more than two decades. “Inflation is still too high, further progress in reducing it is not certain, and the path forward is uncertain,” warned Federal Reserve Chairman Jerome Powell.
If economic data develops as expected, it will likely be appropriate to cut interest rates this year.
Still, the Fed’s new economic forecast continues to suggest the central bank could cut interest rates this year. However, there is much to suggest that this should not start too quickly.
Three reductions?
The Fed expects an average key interest rate of 4.6 percent this year. This suggests three interest rate cuts of 0.25 percentage points each this year. “We believe that our key interest rate (…) has probably reached its peak,” said Powell. If economic data develops as expected, it will “probably be appropriate” to cut interest rates this year.
However, Powell made it clear that he wanted to keep the key interest rate at a high level for longer if that was necessary. Analysts assume that the Fed will not begin to tighten interest rates until summer.
Legend: Fed Chairman Jerome Powell wants to keep key interest rates at a high level for as long as possible. REUTERS/Archive/Elizabeth Frantz
Since March 2022, the Fed has raised its key interest rate by more than five percentage points at a record-breaking pace in the fight against inflation – but has not turned the interest rate screw in the past few months and has left interest rates at a high level.
As expected, the Fed’s rapid interest rate hikes had dampened growth in the largest economy. But the US economic data has positively surprised economists – and probably also the central bankers.
Higher growth
The Fed is now predicting significantly higher economic growth this year than expected three months ago. The gross domestic product (GDP) of the world‘s largest economy will therefore grow by 2.1 percent in 2024 (December: 1.4). The new numbers are likely to reduce the pressure on the Fed to significantly cut interest rates quickly.
Higher core inflation
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The US Federal Reserve also released new inflation estimates. She expects an average inflation rate of 2.4 percent this year. This corresponds to the forecast from December. The Fed expects an inflation rate of 2.2 percent for 2025. Core inflation, i.e. without taking food and energy prices into account, is expected to be 2.6 percent this year (December: 2.4).
In the fight against high consumer prices, the Fed is increasing interest rates in order to slow down demand. If interest rates rise, private individuals and businesses have to spend more on loans – or borrow less money.
Thanks to robust growth, the US Federal Reserve can afford to continue to monitor the situation. The Fed now even expects interest rates to rise slightly in 2025 and 2026 compared to its December forecast as growth and the job market are expected to remain strong.
Legend: The Fed continues to expect inflation of 2.4 percent. This corresponds to the forecast from December 2023, Keystone/Archive/Mary Altaffer
Inflation in prices in the USA had unexpectedly accelerated somewhat recently – inflation is proving to be stubborn. Consumer prices rose by 3.2 percent in February compared to the same month last year. Analysts on average had expected an unchanged rate of 3.1 percent.