US Federal Reserve Despite “too high inflation”: Fed boss Powell wants to cut interest rates soon
Fed Chairman Jerome Powell expects a bumpy road ahead until inflation reaches the target of 2 percent
© Xinhua / IMAGO
The US Federal Reserve is keeping its key interest rate in a range of 5.25 to 5.5 percent. However, there are expected to be three interest rate cuts this year – if inflation allows this
The US Federal Reserve is keeping the course stable and at the same time targeting several interest rate cuts over the course of the year. The monetary authorities around central bank chief Jerome Powell decided on Wednesday to leave the key interest rate in the range of 5.25 to 5.50 percent. In their updated outlook, they also signal that it is likely to fall this year – by 0.75 percentage points. This corresponds to three interest rate steps downwards. The Fed leaders therefore maintained their outlook from December.
Powell emphasized that inflation is basically on the way to the central bank’s target of two percent. But this path can sometimes be “bumpy”, as was shown again at the beginning of the year. However, seasonal effects could have contributed to the increased values in January and February. The monetary authorities wanted to gain a “higher degree of confidence” from the incoming data that inflation was moving sustainably towards the target.
Inflation in the USA has recently been on the rise again. Consumer prices rose by 3.2 percent in February compared to the same month last year, after an inflation rate of 3.1 percent in January. “Inflation is still too high,” emphasized Powell.
Waiting for a signal to turn interest rates
“The Fed remains on course towards a turnaround in key interest rates this year,” says LBBW economist Elmar Völker. The three interest rate cuts announced by the end of the year are a signal that the first downward interest rate move is probably not too far away. From today’s perspective, the monetary policy meeting in June appears to be the earliest possible date for this. “However, if the next inflation report clearly disappoints again, the Fed could wait longer,” points out Commerzbank economist Christoph Balz.
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The Federal Reserve’s Open Market Committee, which is responsible for interest rate policy, will only meet once again until June – on May 1st. According to VP Bank’s chief economist, Thomas Gitzel, there would first have to be clear signals at the upcoming meeting for monetary policy easing in June: “So after the Fed meeting is before the Fed meeting. There is still excitement.”
On Wall Street, investors reacted with relief to the continued prospect of several interest rate cuts this year. The Dow Jones index of standard stocks extended its gains.
Fed wants to reduce balance sheet more slowly
At the same time, Powell signaled that the central bank would slow down the pace of its balance sheet reduction “fairly soon”. He was referring to the ongoing decline in the Fed’s bond holdings. According to Powell, a slowdown in the pace of balance sheet deleveraging from the current level of just under $100 billion per month would reduce the likelihood that the Fed would over-execute and thereby disrupt the money markets. According to Powell, the issue of reducing the securities portfolio has been discussed extensively without a decision having been made yet. Commerzbank economist Balz assumes that this will probably come at the next meeting.
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