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At its May meeting the Federal Reserve left interest rates unchanged between 5.25% and 5.50%, at a 23-year high. The decision, in line with analysts’ expectations, was motivated by inflation that was still too high. The Fed is “committed” to getting inflation back to 2%, but there has been a lack of progress towards the target in recent months, the Fed said at the end of its two-day meeting.
Fed: inflation still high, no progress towards 2% in recent months
«Inflation has fallen in the last year but remains high. There has been a lack of further progress towards the 2% inflation target in recent months.” This is what we read in the press release with which the Fed announced the confirmation of rates in the range between 5.25% and 5.50%. «Recent indicators suggest that economic activity has continued to expand at a solid pace – adds the Fed -. Job growth remained strong and the unemployment rate remained low.” Furthermore, the Federal Open Market Committee (FOMC) “does not expect it to be appropriate to reduce the rate spread until it has greater confidence that inflation is moving sustainably towards 2%”. The FOMC’s decisions were taken unanimously, with 12 out of 12 votes in favour. This is the sixth consecutive meeting in which the Fed left rates unchanged.
Only one rate cut expected this year, in November
The US central bank’s message reflects a sharp change in its interest rate calendar. Already during the last meeting on March 20, Fed policy makers had forecast three rate cuts in 2024, probably starting in June. The Fed’s rate cuts would, over time, reduce financing costs for consumers and businesses. But given the persistence of high inflation, financial markets now expect only one rate cut this year, in November, according to futures prices tracked by the CME’s FedWatch.
More cautious prospects
The Fed’s more cautious outlook stems from three months of data that pointed to persistent inflation pressures and robust consumer spending. Inflation has fallen from a peak of 7.1%, the Fed’s preferred measure, to 2.7%, as supply chains have loosened and the cost of some goods has actually fallen.
Average prices, however, remain well above pre-pandemic levels, and the costs of services ranging from apartment rents and health care to restaurant meals and auto insurance continue to rise. With six months until the presidential election, many Americans have expressed discontent with the economy, particularly the pace of price increases.