the fed
The Fed did not defy most of its previous expectations and on Wednesday announced that it would keep its key interest rate in a range of 5-5.25% for the first time since January 2022, but at the same time signaled that an additional increase (twice) could be possible this year.
After raising interest rates ten times in a row since 2022 last year, the Fed decided to keep rates unchanged.
The Fed favors pausing rate hikes for now as an opportunity to “assess the situation” after recent hikes and a moderation in inflation.
Balancing risks to the economy and the ongoing struggle to contain inflation, the rate-setting Federal Open Market Committee said in a closing statement at its meeting over the past two days that “maintaining the target range (for interest rates) at this meeting allows the committee to assess any Other Information and Its Implications for Monetary Policy Committee Decisions Unanimously.
In its new economic outlook, the Fed said borrowing costs could rise another half a percentage point by the end of the year given a stronger-than-expected economy and moderating inflation.
- The Fed expects interest rates to reach 5.6% by the end of the year.
- The Fed raised its growth forecast for this year to 1%, while slightly lowering its growth forecasts for 2024 and 2025.
- The Fed believes that inflation “remains high” and said it will continue to work to bring inflation back to target. At the same time, he ruled out the possibility that the U.S. economy will enter a recession this year.
- The Fed expects the unemployment rate to reach 4.1% in 2023, compared with a forecast of 4.5% in March.
two main facts
Jay Ritter, a visiting professor at Florida American University, analyzed the decision to keep interest rates unchanged, and said in an interview with Sky News Arab Economics that the Fed’s decision not to change the federal funds rate reflects several main facts as follows:
- First: Inflation continues to decline.
- Second: the impact of the banking crisis.
For the first fact, he pointed out that US inflation is expected to fall, so even if nominal interest rates remain unchanged, “real” interest rates, the difference between interest rates and inflation, will rise.
On the other hand, the “second fact” from his perspective is that there have been some bank failures in recent months, at least in part due to the rapid rise in interest rates.
He added: Failed banks invested in long-term bonds or made long-term loans at fixed rates, assets that fell in value as rates rose. The Fed worries that some other banks could fail if they raise rates further.
fight against inflation
- Federal Reserve Chairman Jerome Powell said on Wednesday that the bank has made strides in fighting inflation and that the full impact of monetary tightening will come later.
- He reiterated the Fed’s commitment to bringing inflation down to its 2 percent goal. He also said it would be inappropriate to lower interest rates this year.
- The Fed chair emphasized that nearly all bank officials expect further rate hikes this year.
- He noted that even if officials do not decide at the upcoming meeting what action they will take in this regard, the July meeting of the FOMC could lead to another rate hike.
- However, he also noted that rates are expected to fall by 1% in 2024 and 2% by the end of 2025. “It’s a long way to go to get inflation back to 2 percent,” he said.
job evaluation
Additionally, Kenneth Kuttner, professor of economics at Williams College, noted in an exclusive interview with Sky News Arab Economics that the Fed’s decision was largely expected given the slowdown in inflation. , so it is to be expected that it will effectively stop raising the inflation rate for a while.
He explained that the Fed wants markets to pause to “assess the situation” and see the impact of previous price increases, which may be the last if inflation continues to decline.
However, Kuttner also spoke of a “recession” scenario that threatens the economy, which would be accompanied by a series of changes in the direction of the country’s monetary policy, at a time when the Fed appears to be leaning towards maintaining interest rates.
Inflation rate
- Annual U.S. inflation fell for the 11th straight month in May to the lowest level in more than two years.
- U.S. annual inflation fell to 4% in May from 4.9% in April, better than expectations for a dip to only 4.1%, data from the U.S. Bureau of Labor Statistics showed on Tuesday.
- On a monthly basis, consumer prices rose 0.1% in May, in line with expectations, after rising 0.4% in April.
- As for core inflation – which excludes food and fuel – it slowed for the second month in a row to come in at 5.3%, compared with 5.5% in April and above expectations for 5.2%.
- On a monthly basis, core inflation was 0.4% in May, in line with expectations from April and unchanged from the previous month.
Since March 2022, the Fed’s key interest rate has been raised by 5 percentage points to a range of 5% to 5.25%.
Inflationary pressure
In addition, Robert Pollan, an economics professor at the University of Massachusetts, said in an exclusive statement to the Sky News Arab Economics website that the Fed’s decision not to raise interest rates for the first time in 15 months reflects the fact that inflationary pressures chasing the US economy have already subside.
He added, “In fact, inflationary pressures have been subsiding for several months. The Fed is slowly catching up. Now that the Fed has a breather, it’s time for policy makers at the Fed and other government agencies to start doing things.” Alternative to controlling inflation.
According to the American scholar’s estimation, these measures may include the imposition of windfall profits tax and stricter anti-monopoly enforcement.
The key point, Poulin emphasized, is that the main driver of inflationary pressures over the past year has been corporate profit margins to generate monopoly profits in the face of short-term supply shortages.
recession scenario
Regarding the “recession” scenario that threatens the US economy, VI Markets CEO Ahmed Moati said in an exclusive statement to Arab Economic Sky News that the Fed’s recent statement is clear and said that the idea of a recession has become a reality, especially in the The increase in growth forecasts to 1% also raised expectations for the unemployment rate to fall to 4.1% in 2023, from 4.5% in March last year, reflecting an improvement in employment.
“Yesterday’s statement shifted concerns about a recession scenario and sought to confirm that the U.S. economy is strong and coherent,” he added, noting that the impact of the data appears to be mixed, especially as the Fed tries to hold out from the middle, although it expects growth . 1%, despite the strong employment data, he hinted at a rate hike this year, and when asked about it by Fed Chairman Jerome Powell, he said, “The statement is not binding, and if the data improves, our opinion may will change.”
Given the matter’s connection to improving data, a “cautiously optimistic tone” dominated Powell’s statement, with Powell leaving the door open to both scenarios, Moty said.
With the potential for a downturn in the economy, he explained, the downturn will be mild as the Fed sees improvement on the horizon and slightly raises growth expectations, especially given the strong performance especially in artificial intelligence.
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