The Fed chairman warned, however, ‘the path to lower inflation is unliable and what will happen ahead is not at all clear’; interest rates, therefore, will be kept on the high side for a while.
The main aim of this meeting was to put a stop to inflation, so as reported, the Federal Reserve announced that it would hold rates at their highest level in two decades. They stated this in reference to a ‚‚„lack of further progress“ with respect to its inflation goal.
“Unemployment, Powell stated, is not as low as it should be and its way down to acceptable levels of inflation is not simple. In fact, it is risky and uncertain,” the Fed Chairman told reporters after the decision.
Likewise, Powell further expanded on this matter in his comments explaining, “the Fed doesn’t see rate-reductions as a suitable option until it has reassurance in the context of inflation rates heading towards the two per cent resiliently.”
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However, Powell added that it was unlikely the next move would be a rate hike.
The central bank also decided to slow its sales of securities, a move designed to keep the financial system operating smoothly following its extraordinary injection of liquidity into the banking sector during the COVID-19 pandemic.
Stocks rose after the decision, with the Dow Jones Industrial Average surging more than 400 points.
The Fed’s decision to keep interest rate policy on hold means there will be little relief for consumers who are paying elevated costs for borrowing on everything from cars to credit cards to home mortgages.
“It’s quite different from a year ago when everyone was forecasting a recession,” says Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds. “I think they could be on hold for a while.”
Markets are pricing in the first cut to interest rates in late summer or early fall. When the year began, expectations were for six rate cuts in 2024.
For the Fed, the strong economy and labor market is proving a headwind to its goal of bringing inflation down to 2% annually, a level it was at prior to the pandemic. Many economists believe that will prove very difficult to achieve without a serious downturn in the economy or a recession.
“With inflation data continuing to be surprisingly hot for the past quarter, the narrative that these surprises are all attributable to “one offs’ in individual components is becoming harder to sustain,” said Vanguard economists Joe Davis and Josh Hirt.
“Time will tell but the data suggest that what we call a ‘deferred landing’ is more likely than the long anticipated ‘soft landing,’” they added. “Along with our forecast for core inflation pressures to remain elevated as supply tailwinds fade, we expect this to keep the Fed cautious on cutting rates this year.”
The Dow tanked 570 points on Tuesday due to a reading of inflation on workers’ wages as well as due to warnings from companies about consumer’s extension at higher prices.
April witnessed a decline in the consumer confidence index according to the survey results by the Conference Board. The frequently mentioned causes of this shift by consumers were the rising fuel and food expenses.
Last economic records has demonstrated the economy still grows at a moderate pace despite the fact consumers keep spending money although this leads to empty savings and using credit cards in order to maintain the compilation levels.
