In a statement issued on Wednesday, the US Federal Reserve left interest rates constant while also signalling it still anticipates one more increase before the end of the year and fewer cuts than previously anticipated next year.
According to forecasts the central bank issued at the conclusion of its two-day meeting, if that last increase materialises, that would be it for this cycle. If the Fed moves on with the decision, it will be the 12th raise since the tightening of policy started in March 2022.
Markets had fully anticipated that there would be no change at this meeting, keeping the fed funds rate at its target range of 5.25%–5.5%, the highest in about 22 years.
The rate controls the overnight lending fees that banks charge one another, but it also affects many different types of consumer debt.
Even though the no-hike was anticipated, the next course of action for the Federal Open Market Committee, which sets interest rates, was very unpredictable. According to the documents disclosed on Wednesday, the bias favours a more restrictive policy and an interest rate strategy that is higher for a longer period of time.
The Nasdaq Composite dropped 1.5% and the S&P 500 fell about 1% as a result of that projection. As Fed Chair Jerome Powell fielded questions during a news conference, stocks fluctuated.
“We’re in a position to proceed carefully in determining the extent of additional policy firming,” Powell said.
He did add, though, that the central bank would want to see more advancement in the war against inflation.
“We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion,” he said.
The Fed's dot plot projections indicated that there was a chance of one more hike this year, followed by two cuts in 2024—two fewer than had been predicted during the previous update in June. The funds rate would then be close to 5.1%. Members can anonymously suggest where they believe rates are headed on the plot.
Seven attendees were against the further raise, while twelve were in favour. One more people opposed it as a result than in the June meeting. Adriana Kugler, the recently-confirmed Fed governor, did not cast a ballot at the most recent meeting. Additionally, the forecast for the fed funds rate increased for 2025, with the median expectation rising to 3.9% from 3.4% previously.
Members of the FOMC projected a funds rate of 2.9% in 2026 for the longer term. That is higher than what the Fed deems to be the "neutral" rate of interest, which neither promotes nor inhibits growth. The group had never before looked ahead to 2026. The predicted neutral rate over the long run stayed at 2.5%.
“Chair Powell and the Fed sent an unambiguously hawkish higher-for-longer message at today’s FOMC meeting,” wrote Citigroup economist Andrew Hollenhorst. “The Fed is projecting inflation to steadily cool, while the labor market remains historically tight. But, in our view, a sustained imbalance in the labor market is more likely to keep inflation ‘stuck’ above target.”
Members significantly increased their estimates of economic growth for this year along with the rate projections, with the gross domestic product now projected to rise 2.1% this year. Given that it was more than double the June prediction, members do not see a recession coming anytime soon. The forecast for the GDP in 2024 increased to 1.5% from 1.1%.
The core personal consumption expenditures price index, which measures predicted inflation, also showed a decrease in June, falling 0.2 percentage points to 3.7%. The prognosis for unemployment also decreased, falling to 3.8% from 4.1% to 3.8%.
The post-meeting statement underwent a few adjustments that reflected the modification in the economic outlook.
The committee described economic growth as "expanding at a solid pace," as opposed to the "moderate" descriptions used in earlier remarks. Additionally, it stated that job gains "have slowed in recent months but remain strong." In contrast, past statements referred to the employment picture as "robust."
In addition to maintaining rates at elevated levels, the Fed has been gradually reducing its bond holdings since June 2022, which has reduced the balance sheet of the central bank by about $815 billion. The Fed is not reinvesting the up to $95 billion in revenues from maturing bonds that are allowed to run off each month.
The Fed's decisions were made at a precarious period for the American economy.
In recent public appearances, Fed officials shown a change in perspective from one where they believed it was preferable to take excessive action to reduce inflation to one that is more balanced. This is partially a result of the rate hikes' perceived lag effects, which marked the Fed's hardest monetary policy since the early 1980s.
The possibility that the central bank will succeed in bringing down inflation without sending the economy into a severe recession is showing indications of growth. Future events are still far from guaranteed, and Fed officials have emphasised caution about prematurely announcing victory.
“We, like many, expected to see the hawkish hold that Powell nodded to at Jackson Hole,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management. “However, the release was more hawkish than expected. While a share of past policy tightening is still in the pipeline, the Fed can go into wait and see mode, hence the pause. However, the main risk remains tarnishing their largest asset, anti-inflation credibility, which warrants favoring a hawkishness reaction function.”
The median dot is anticipated to grow higher next year due to the recent increase in energy prices as well as resilient consumption, she said.
“We don’t see a singular upcoming bearish catalyst, although strikes, the shutdown, and the resumption of student loan repayments collectively will sting and drive bumpiness in the data between now and their next decision. As a result, we believe that their next meeting will be live, but not a done deal,” Wilson-Elizondo said.
With an unemployment rate of 3.8% that is only somewhat higher than it was a year ago, the employment situation has remained strong. Job opportunities have been declining, which has assisted the Fed in making progress in addressing a supply-demand imbalance where there were formerly two positions available for every worker.
The numbers on inflation have also improved, but the annual rate is still significantly higher than the Fed's target of 2%. The preferred indicator of the central bank for July indicated core inflation, which excludes volatile food and energy costs, was averaging 4.2%.
Consumer spending, which accounts for approximately two-thirds of all economic activity, has remained strong even as savings have decreased and credit card debt has for the first time surpassed the $1 trillion threshold.
In a recent survey conducted by the University of Michigan, expectations for inflation over the next one and five years both fell to multiyear lows.
(Source:www.cnbc.com)
According to forecasts the central bank issued at the conclusion of its two-day meeting, if that last increase materialises, that would be it for this cycle. If the Fed moves on with the decision, it will be the 12th raise since the tightening of policy started in March 2022.
Markets had fully anticipated that there would be no change at this meeting, keeping the fed funds rate at its target range of 5.25%–5.5%, the highest in about 22 years.
The rate controls the overnight lending fees that banks charge one another, but it also affects many different types of consumer debt.
Even though the no-hike was anticipated, the next course of action for the Federal Open Market Committee, which sets interest rates, was very unpredictable. According to the documents disclosed on Wednesday, the bias favours a more restrictive policy and an interest rate strategy that is higher for a longer period of time.
The Nasdaq Composite dropped 1.5% and the S&P 500 fell about 1% as a result of that projection. As Fed Chair Jerome Powell fielded questions during a news conference, stocks fluctuated.
“We’re in a position to proceed carefully in determining the extent of additional policy firming,” Powell said.
He did add, though, that the central bank would want to see more advancement in the war against inflation.
“We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion,” he said.
The Fed's dot plot projections indicated that there was a chance of one more hike this year, followed by two cuts in 2024—two fewer than had been predicted during the previous update in June. The funds rate would then be close to 5.1%. Members can anonymously suggest where they believe rates are headed on the plot.
Seven attendees were against the further raise, while twelve were in favour. One more people opposed it as a result than in the June meeting. Adriana Kugler, the recently-confirmed Fed governor, did not cast a ballot at the most recent meeting. Additionally, the forecast for the fed funds rate increased for 2025, with the median expectation rising to 3.9% from 3.4% previously.
Members of the FOMC projected a funds rate of 2.9% in 2026 for the longer term. That is higher than what the Fed deems to be the "neutral" rate of interest, which neither promotes nor inhibits growth. The group had never before looked ahead to 2026. The predicted neutral rate over the long run stayed at 2.5%.
“Chair Powell and the Fed sent an unambiguously hawkish higher-for-longer message at today’s FOMC meeting,” wrote Citigroup economist Andrew Hollenhorst. “The Fed is projecting inflation to steadily cool, while the labor market remains historically tight. But, in our view, a sustained imbalance in the labor market is more likely to keep inflation ‘stuck’ above target.”
Members significantly increased their estimates of economic growth for this year along with the rate projections, with the gross domestic product now projected to rise 2.1% this year. Given that it was more than double the June prediction, members do not see a recession coming anytime soon. The forecast for the GDP in 2024 increased to 1.5% from 1.1%.
The core personal consumption expenditures price index, which measures predicted inflation, also showed a decrease in June, falling 0.2 percentage points to 3.7%. The prognosis for unemployment also decreased, falling to 3.8% from 4.1% to 3.8%.
The post-meeting statement underwent a few adjustments that reflected the modification in the economic outlook.
The committee described economic growth as "expanding at a solid pace," as opposed to the "moderate" descriptions used in earlier remarks. Additionally, it stated that job gains "have slowed in recent months but remain strong." In contrast, past statements referred to the employment picture as "robust."
In addition to maintaining rates at elevated levels, the Fed has been gradually reducing its bond holdings since June 2022, which has reduced the balance sheet of the central bank by about $815 billion. The Fed is not reinvesting the up to $95 billion in revenues from maturing bonds that are allowed to run off each month.
The Fed's decisions were made at a precarious period for the American economy.
In recent public appearances, Fed officials shown a change in perspective from one where they believed it was preferable to take excessive action to reduce inflation to one that is more balanced. This is partially a result of the rate hikes' perceived lag effects, which marked the Fed's hardest monetary policy since the early 1980s.
The possibility that the central bank will succeed in bringing down inflation without sending the economy into a severe recession is showing indications of growth. Future events are still far from guaranteed, and Fed officials have emphasised caution about prematurely announcing victory.
“We, like many, expected to see the hawkish hold that Powell nodded to at Jackson Hole,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management. “However, the release was more hawkish than expected. While a share of past policy tightening is still in the pipeline, the Fed can go into wait and see mode, hence the pause. However, the main risk remains tarnishing their largest asset, anti-inflation credibility, which warrants favoring a hawkishness reaction function.”
The median dot is anticipated to grow higher next year due to the recent increase in energy prices as well as resilient consumption, she said.
“We don’t see a singular upcoming bearish catalyst, although strikes, the shutdown, and the resumption of student loan repayments collectively will sting and drive bumpiness in the data between now and their next decision. As a result, we believe that their next meeting will be live, but not a done deal,” Wilson-Elizondo said.
With an unemployment rate of 3.8% that is only somewhat higher than it was a year ago, the employment situation has remained strong. Job opportunities have been declining, which has assisted the Fed in making progress in addressing a supply-demand imbalance where there were formerly two positions available for every worker.
The numbers on inflation have also improved, but the annual rate is still significantly higher than the Fed's target of 2%. The preferred indicator of the central bank for July indicated core inflation, which excludes volatile food and energy costs, was averaging 4.2%.
Consumer spending, which accounts for approximately two-thirds of all economic activity, has remained strong even as savings have decreased and credit card debt has for the first time surpassed the $1 trillion threshold.
In a recent survey conducted by the University of Michigan, expectations for inflation over the next one and five years both fell to multiyear lows.
(Source:www.cnbc.com)
