US Federal Reserve keeps rates steady but dampens expectations for rate cuts

Last night, the US Federal Reserve held its benchmark interest rates but indicated support for a second rate increase this year. It also signaled fewer rate cuts for next year than had been previously suggested.

The Fed funds rate was held steady by the US central banks at 5.25-5.5% this month. This is a record high for 22 years and it’s in line with the market expectations.

The Fed’s policymakers stated that they expect only one rate increase to occur this year and that borrowing costs will remain high throughout the next year.

The Fed’s “dot-plot” of predictions indicated that interest rates will fall to an average 5 percent in 2024. This implies that only two rate reductions are expected next year. This is less than the four cuts that ratemakers had predicted at their July meeting.

The rate-setting panel said in a statement that it was “prepared to adjust monetary policy if necessary if there are risks that could hinder the achievement of the committee’s objectives”. In June, the Fed did not raise rates. It then tightened monetary policy in August. The markets and economists expect the world’s largest central bank to maintain rates “higher longer” despite signs that inflation has been steadily declining to the 2 percent target.

US consumer prices inflation declined from a high of 9.1 percent last summer to 3.7% in August. This is an increase over the previous month following a recent spike in global energy costs.

Jerome Powell, the chairman of Fed, stated that they had not yet decided if more rate hikes were necessary. He said that the Fed was in the position to “proceed with caution in determining whether additional policy firming may be appropriate.” We will continue making our decisions at each meeting.

“We will continue to maintain a policy of restraint until we feel confident that the inflation rate is falling sustainably towards our target,” he said. Let’s wait and see what the data says. “We want to see good inflation data for longer than just a few weeks.”

US economic growth is expected to dip in next year despite signs of a slowdown. The US economy has shown remarkable resilience despite aggressive monetary policy. Even though there are signs of a slower economy, economists remain optimistic that the Fed can achieve a soft landing where inflation will fall steadily to its target without creating mass unemployment.

The outlook for the growth of next year is worsened by the possibility of mass industrial actions by US auto workers and Presidential elections in late 2024, which could lead to increased policy uncertainty.

The Fed staff upgraded its US growth forecasts, despite this background. They now expect the US to grow by 2.1 percent this year and 1.5% next year.

Paul Ashworth is the chief North America economist for Capital Economics. He said that Fed’s predictions were overly optimistic. He said that a mild recession, or even a near-recession is more likely than a strong economic growth in the coming months.

The Fed is sending a clear message that it wants the markets believing in its mantra of “higher for longer”.

Wall Street was downbeat after the Fed made its comments. The Dow Jones Industrial Average closed down 76.85, or 0.2%, at 34440.88. Meanwhile, the S&P 500, which is more widely based, shed 41.75, or 0.9%, points to 4,402.20.