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U.S. Federal Reserve Maintains Expectation of Three Interest Rate Cuts Despite Elevated Inflation

Credits: The Economic Times

Federal Reserve officials have signaled their intention to continue cutting the key interest rate three times in 2024 despite persistent signs of elevated inflation at the beginning of the year. This announcement sparked a rally on Wall Street, although the benchmark rate remained unchanged for the fifth consecutive time.

Chair Jerome Powell, speaking at a news conference, stated that the recent uptick in inflation during January and February had not fundamentally altered the Fed’s economic outlook. The central bank still anticipates inflation to gradually cool, albeit at a slower pace than previously expected.

U.S. Federal Reserve (Credits: The New York Times)

In their new quarterly projections, the Fed’s policymakers forecasted that robust growth and inflation above the 2% target level would persist into the following year.

Despite this, the Fed expects a scenario of a healthy job market and economy alongside cooling inflation, albeit at a slower pace than initially predicted.

Powell highlighted the Fed’s consideration of “two-sided” risks in determining the timing of rate cuts. The Fed aims to strike a balance between avoiding a resurgence of inflation through excessive easing and preventing unnecessary harm to employment by delaying rate cuts.

U.S. Federal Reserve (Credits: The New York Times)

Lowering interest rates over time would reduce borrowing costs for various purposes, potentially benefiting President Joe Biden’s re-election bid amidst public dissatisfaction over higher prices.

While the Fed adjusted its outlook slightly, projecting only three rate cuts by 2025, down from four in previous forecasts, core inflation is expected to remain elevated.

Most economists anticipate the Fed will announce its first rate cut in June, beginning a reversal of the rate hikes implemented over the past two years.

Although consumer inflation has declined since mid-2022, it has remained above 3%, particularly in the service sector. The rate hikes impact borrowing for goods, but their effect on service spending is limited. As long as the economy remains healthy, the Fed will likely delay rate cuts until inflation is under control.

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