“No progress” on inflation | The Fed keeps rates unchanged

(Washington) The US central bank (Fed) left its interest rates unchanged on Wednesday at the end of its last meeting, citing a recent “lack of progress” on the inflation front, but said it would reduce its asset volume at a slower pace from June.

The U.S. Federal Reserve left interest rates at their highest level in more than two decades, between 5.25% and 5.50%, the range they have been in since July, it said in a news release at the end of its meeting.

This results in maintaining high interest rates on home loans, credit cards, car loans, etc. to prevent further price increases.

And Fed Chairman Jerome Powell warned at a press conference that it would likely take “longer than expected” to build confidence in falling inflation. Understand that rates will stay high longer.

He refrained from making any predictions about when rates would start to come down, amid fears of prices rising again and concerns that it would put too much of a burden on economic activity.

However, Jerome Powell judged that “the next rate move is unlikely to be a hike,” with monetary policy being “sufficiently restrictive” over time, he and his colleagues said.

That caused Wall Street to jump at the time, but ended the session divided.

“Postponed, not cancelled”

“It is clear from Chairman Powell’s remarks that most (perhaps not all) policymakers continue to believe that the interest rate is at its peak for this tightening cycle and that it will be appropriate to ease monetary policy this year,” Gregory commented. Daco, EY’s chief economist, in a note.

Markets that had been hopeful that rates would start falling in June are now betting on September or November, according to CME Group estimates.

“The timing of the first rate cut will depend on sustained easing of inflation,” notes Oxford Economics economist Nancy Vanden Houten.

But the message is that “rate cuts are being delayed, not canceled,” points out Krishna Guha, an economist at Evercore, an investment advisory firm.

In its press release, the Committee on Monetary Policy (FOMC) highlighted the “lack of further progress” in recent months on the inflation front to reach the 2% target.

However, the price curve seemed to be on the right trajectory. But it has started to rise again since January, to 2.7% over the year in March, according to the Fed’s preferred PCE index — the one it wants to cut to 2% — and to 3.5% according to the CPI index. .

Deflate the balance sheet more slowly

Despite the rebound, the Federal Reserve is marking the beginning of monetary policy easing: it announced on Wednesday that it will reduce the amount of assets on its balance sheet more slowly starting in June.

It will reduce its Treasury holdings by $25 billion per month, while it currently reduces $60 billion each month.

The Fed’s portfolio grew during the pandemic as it massively bought securities and flooded the market with liquidity to keep the financial system running.

Then, along with raising rates to fight inflation, it sold securities, reducing its portfolio by $1.5 trillion.

The US labor market also remains too tight for businesses for the Fed’s liking. Official data for April will be released on Friday, but private sector businesses alone added 192,000 jobs last month, according to the monthly ADP/Stanford Lab survey released Wednesday.

To conclude, the employment cost index was much higher than expected in the first quarter.

The recovery in inflation in the United States contrasts with Europe, where a sharp slowdown in inflation is leading the European Central Bank (ECB) to consider cutting rates as early as June.

Jerome Powell also reminded six months before the presidential election that the Fed is independent of political power. The vote, pitting Democratic President Joe Biden against his Republican predecessor, Donald Trump, will take place a day before the Monetary Policy Committee meets.

Source link

Leave a Comment