The Federal Open Market Committee (FOMC) decided to hold its key interest rate at 5.25 – 5.5% in September in a unanimous decision, according to its statement on Wednesday. This decision followed a 25-basis point rate increase in July, bringing the benchmark rate to its highest level in 22 years.
The potential impact of more stringent credit conditions on households and businesses is expected to exert downward pressure on economic activity, employment, and inflation. The magnitude of these repercussions remains uncertain it said, emphasising the Federal Open Market Committee’s continued vigilance regarding inflationary risks.
Out of the 19 decision-makers in the FOMC, around 12 of them think that it’s a good idea to increase interest rates once more this year, based on the Fed’s economic forecasts. The other seven prefer to keep the rates where they are.
The committee’s predictions indicate that the median Federal Funds rate for 2024 is expected to be 5.1%. This is higher than what they had estimated back in June, which was 4.6%. It suggests that interest rates might stay elevated for a longer period than previously thought. In 2025, the rate is anticipated to drop to 3.9%, and in 2026, it’s expected to further decrease to 2.9%.
“Holding the rate doesn’t mean we have reached the stance we seek,” Powell said, during the press conference after the FOMC decision was announced. But he said the Fed is “fairly close” to where it needs to be on policy.
Powell also indicated that the central bank is positioned to proceed cautiously when it comes to tightening interest rates. He noted that the labour market is gradually achieving a better balance between supply and demand.
Furthermore, he emphasised that while real interest rates are currently positive, they need to remain in positive territory for an extended period. He also mentioned the possibility that the neutral interest rate may be higher than the long-term rate.
In addition, the Federal Reserve upgraded its median projection for economic growth in 2023. The projection for real Gross Domestic Product (GDP) growth in 2023 now stands at 2.1%, up from the 1% estimate provided in June. The central bank further forecasted a 1% economic growth rate for 2024.
Federal Reserve officials have revised their expectations for the peak jobless rate, now projecting it to reach 4.1% instead of the previously estimated 4.5% as of June.
The Federal Reserve expressed confidence in the strength and resilience of the US banking system. It acknowledged that tighter credit conditions for households and businesses could have a dampening effect on economic activity, hiring, and inflation.
Moreover, the Fed Committee reaffirmed its strong commitment to achieving the 2% inflation objective. This commitment comes as the Consumer Price Index rose by 0.6% in August on a seasonally adjusted basis, surpassing expectations and following a 0.2% increase in July, as reported by the U.S. Bureau of Labor Statistics.
Over the past 12 months, the all-items index witnessed a 3.7% increase before seasonal adjustment. Core inflation also exceeded expectations, rising by 0.3% instead of the anticipated 0.2%.
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