The US Federal Reserve continues to promise interest rate cuts this year, but is keeping all options open as to timing. The central bank on Wednesday left its key interest rate high in the range of 5.25 to 5.5 percent. Commercial banks can borrow money from the central bank at this rate. The key interest rate remains higher than it has been in more than two decades. In light of persistent inflation, Federal Reserve Chairman Jerome Powell did not specify in his press conference when the right time would be to pivot interest rates.
“Inflation has fallen significantly while the labor market has remained strong, and that is very good news,” Powell said. However, the economic outlook is uncertain. At the same time, he made it clear that the official interest rate has currently reached its peak. Fed officials expect an average interest rate of 4.6 percent this year, as in their last estimate in December. That suggests three rate cuts of 0.25 percentage points each this year.
Powell: “We make our decisions from meeting to meeting”
Powell did not make clear when the Federal Reserve will begin cutting interest rates. “We make our decisions session by session,” he said. New economic data from the central bank of the world's largest economy should reduce pressure on the Federal Reserve to quickly and significantly reduce interest rates. The Federal Reserve now predicts significantly higher economic growth for the US this year than expected three months ago. Gross domestic product (GDP) will therefore grow by 2.1 percent in 2024 (December: 1.4).
For the Federal Reserve, fighting high consumer prices is a balancing act. It is turning the screw on interest rates to slow demand. If interest rates rise, individuals and businesses will have to spend more on loans or borrow less money. Growth is slowing, businesses cannot pass on higher prices indefinitely, and, ideally, the inflation rate is falling. If interest rates are too high, there is a risk of a recession.
Since March 2022, the Federal Reserve has raised its key interest rate by more than five percentage points at a record pace in an effort to combat inflation, but has left interest rates at a high level in recent months. The inflation rate has fallen significantly and prices are now rising much more slowly. In the summer of 2022, the rate was more than 9 percent, the highest in about four decades. Recently, price inflation in the US has accelerated somewhat unexpectedly: in February the inflation rate was 3.2 percent; inflation appears persistent. The Federal Reserve is aiming for 2 percent.
“Contradictory message from Washington”
New inflation estimates from the Federal Reserve show that this goal is unlikely to be met any time soon. As in December, the US Federal Reserve expects an average inflation rate of 2.4 percent this year. The Federal Reserve assumes a 2.2 percent inflation rate by 2025; the Federal Reserve only forecasts 2 percent for 2026. Core inflation, that is, excluding food and energy prices, is expected to reach 2.6 percent this year (December: 2.4 ). Central bankers pay special attention to this value in their analyses. According to experts, it better reflects the general price trend than the global price, because components susceptible to fluctuation are excluded.
The next Federal Reserve meeting is in six weeks. Analysts do not assume that there will be a reduction in interest rates by then. June now looks realistic as the earliest possible date for a turnaround in interest rates, wrote analyst Elmar Völker at Landesbank Baden-Württemberg. “If inflation continues to be more persistent than expected, the change could be postponed until the summer.” It is a “mixed message from Washington.” In response to the Federal Reserve's decisions, the Dow Jones Industrial and the S&P 500 reached new highs and the price of the euro rose noticeably.