Powell defends decision to pause tightening campaigns in the face of persistently higher inflation .The Federal Reserve signalled its support for two more interest rate rises this year, including one that could be implemented at its next meeting in July, even as it skipped an increase for the first time in more than a year.
The Federal Open Market Committee, at its conclusion of a two-day meeting on Wednesday, voted unanimously in favor of avoiding another quarter-point increase to the Federal Funds Rate and keeping it within the current target range between 5 percent and 5.25 percent.
Fed chairman Jay Powell has made it clear that despite the first reprieve from an aggressive monetary tightening program that began in March 2022 the US central banks intends to squeeze even further the world’s biggest economy to bring persistently rising inflation under control.
Powell, in a presser after the decision on rates, said that “nearly all participants” of the committee believed it was likely that there would be some more rate increases this year. Powell said he expects the next meeting to be “live”, sending a strong signal that the Fed will likely raise rates on the 26th of July.
According to a new “dot chart” that was published on Wednesday, which collates forecasts from officials until 2025, most policymakers expect two more quarter-point increases in 2019. This would bring the benchmark rate up to between 5.5% and 5.75 %.
Powell, who is a Fed member, believes that further rate increases are needed. However, Powell has defended his decision to keep rates unchanged on Wednesday. He argued it was prudent, given the efforts the Fed has made to dampen economic activity. Powell said that the committee also took into consideration “potential headwinds”, such as the recent banking crisis in the region.
Citadel Securities’ Michael de Pass said: “This is a difficult place for the Fed because communication is very difficult.” “They are saying that there hasn’t yet been enough progress in inflation but they’re also pausing.”
Powell said that the Fed would need “credible proof” that the inflation rate is peaking and then starting to fall before it could conclude the Fed had squeezed the economic system sufficiently. He noted there had been very little progress made in reducing core inflation in recent months.
The Fed is expected to tighten monetary policy to combat inflation. Most officials predict that the fed funds rates will fall to 4.6% in 2024, and 3.4% in 2025.
After Powell’s presser, the yield of the 2-year Treasury note, a measure that moves in line with expectations for interest rates, reached its highest level since the middle of March. Futures traders reduced their bets that the Fed would cut rates in 2019. US stocks swung back and forth, initially falling before recovering.
When the dot plots were last updated in March, many policymakers predicted that the central bank wouldn’t raise rates above the current level. This was largely due to the aftermath of Silicon Valley Bank failures and other lenders.
Since then, economic data has been mixed. This has sparked a heated debate between Fed officials about whether and when to raise rates. Economists polled predicted last week that the central bank will raise rates two more times in this year, to a range of between 5.5% and 6.5%.
, the latest report on consumer prices, released Tuesday, shows a slowdown in inflation despite price pressures persisting across many sectors of the economy. The labour market is still very strong and has not lost any momentum. This encourages consumers to continue spending.
According to projections released Wednesday, the majority of officials now expect “core” inflation based on the Personal Consumption Expenditures Price Index to decrease to 3.9 percent this year, before slowing further to 2.6% in 2024, and 2.2% in 2025.
This suggests that inflation will decline more slowly than previous forecasts, which were released in March and had a median estimate of core PCE for 2023 at 3.6 percent. It currently hovers at 4.7 percent.
The official forecasts for this year also show a much higher rate of growth, with an economy that expands by 1 percent. This is a significant increase over the estimate of 0.4 percent released in March. The unemployment rate will peak in 2024 at 4.5 percent, just a little bit below the previous forecast of 4.6 percent.