Central bankers are facing the difficult task of balancing the risk of cutting too soon with the risk of cutting too late — both of which come with consequences
The Federal Reserve on Wednesday kept its key interest rate unchanged for the fifth time but signalled three cuts this year.
The Fed’s decision to keep its key lending rate between 5.25 per cent and 5.50 per cent lets policymakers “carefully assess incoming data, the evolving outlook and the balance of risks,” the central bank said in a statement.
The Fed has raised rates aggressively over the past two years to a 23-year high in a bid to fight the highest inflation in decades. But while Americans continue to battle high-interest rates and inflation, Fed officials are still not ready to cut interest rates and bring down the cost of borrowing.
Central bankers are facing the difficult task of balancing the risk of cutting too soon with the risk of cutting too late — both of which come with consequences.
Last year, the Fed’s policies proved to be a success: inflation eased dramatically from the multi-decade highs seen in 2022 toward the Fed’s long-term two percent target, while the United States was able to avoid a recession thanks to unexpectedly strong economic growth.
But 2024 has been more challenging, with the country seeing a small uptick in the pace of monthly inflation — renewing fears that interest rates will have to remain high for longer to bring prices under control.
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“Since the start of this year, expectations about 2024 central bank easing have been pared back materially,” economists at JP Morgan wrote in a recent investor note.
“But that has not disrupted the general trend toward an easing in global financial conditions,” they added.
Growth Forecast Lifted
Alongside its rate decision, Fed policymakers also updated their economic forecasts on Wednesday, sharply upgrading the US growth outlook for this year to 2.1 per cent, from 1.4 per cent in December.
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Policymakers left the headline inflation forecast unchanged, but slightly raised the outlook for annual so-called “core” inflation — which excludes energy and food prices — to 2.6 per cent.
Members of the rate-setting Federal Open Market Committee (FOMC) also left the median projection for interest rates at end-2024 at the midpoint between 4.50 and 4.75.
This means they still expect 0.75 percentage points of cuts before the end of the year, which would likely translate into three 0.25 percentage point cuts.
(with inputs from AFP)
