In a move that underscores its cautious approach to monetary policy, the Federal Reserve has opted to keep interest rates steady at 5.25-5.5% and signaled it expects to implement only a single quarter-point rate cut in 2024. This decision marks a departure from earlier projections that anticipated up to three rate reductions within the year. The Fed’s decision comes amid modest signs of progress in cooling inflation, with the Consumer Price Index (CPI) for May showing an annual increase of 3.3%, a slight decrease from previous months but still above the central bank’s 2% target. Fed Chair Jerome Powell has emphasized the importance of ensuring inflation is on a downward trajectory towards the 2% goal before committing to further rate cuts. Despite the high borrowing costs impacting sectors like the housing market, the economy has maintained strong job growth and rising wages. The Fed’s updated long-term interest rate estimate has risen to 2.8% from 2.6%, indicating that policymakers believe the economy requires more restraint to successfully combat inflation. Financial markets have adjusted their expectations in response to the Fed’s hawkish stance, with some analysts now predicting a more rapid fall in the official interest rate next year, forecasting reductions totaling one percentage point in 2025 and 2026. The S&P 500 and Nasdaq Composite reacted positively to the news, hitting new highs, while the US dollar and yields on US Treasuries fell.
Key points
- The Federal Reserve maintains interest rates at 5.
- Inflation shows modest cooling with a 3.
- Fed Chair Jerome Powell stresses the need for more evidence of sustainable inflation reduction before rate adjustments.
- Financial markets react to the Fed’s decision, with the S&P 500 and Nasdaq reaching new highs.
25-5.
5%, with only one quarter-point rate cut expected in 2024.
3% annual CPI for May, yet above the 2% target.
