All three major Wall Street indexes closed at new highs.
The Federal Reserve voted on Wednesday to keep interest rates at a 23-year high for a fifth consecutive meeting, while saying it still expected three rate cuts this year.
The news pushed U.S. markets higher, with traders welcoming the central bank’s confirmation that three interest rate cuts are likely despite a recent rise in monthly inflation.
All three major Wall Street indexes closed at new highs.
The Fed said in a statement that it unanimously decided to keep its key lending rate between 5.25% and 5.50% to allow policymakers to “carefully evaluate incoming data, the evolving outlook and the balance of risks.”
Last year, the Fed’s policies proved successful: Inflation fell sharply from multi-decade highs in 2022 and moved toward its long-run target of 2%, while the U.S. avoided a widely forecast recession with an unexpectedly strong economy. grow.
But 2024 will be more challenging, with data for the first two months showing a slight rise in monthly inflation, reviving concerns that interest rates will have to stay higher for longer to control prices.
“Inflation remains too high,” Powell told reporters after the rate decision. “Sustained progress in lowering inflation is uncertain and the path forward is uncertain,” he added.
But Powell said that despite the recent uptick, this year’s inflation data “doesn’t really change the overall picture, which is that inflation has been a bumpy and gradual decline at times on the road to 2 percent.”
Growth forecast revised upwards
In addition to the interest rate decision, Federal Reserve policymakers also updated their economic forecasts on Wednesday, significantly raising the outlook for U.S. growth this year to 2.1% from 1.4% in December.
Fed officials kept their overall inflation expectations unchanged but slightly raised their outlook for annual so-called “core” inflation, which excludes energy and food prices, to 2.6%.
Members of the Federal Open Market Committee (FOMC), which sets interest rates, also kept their median rate forecast for the end of 2024 at a midpoint between 4.50 and 4.75.
This means they still expect a 0.75 percentage point cut by the end of the year, which could translate into three 0.25 percentage point cuts.
Before Wednesday’s decision, some analysts had predicted that inflation could lead the Federal Open Market Committee to reduce the number of rate cuts expected from three to two this year, but that ultimately did not happen.
“The Fed sent a straightforward dovish message: It will cut rates even if inflation or growth is stronger than expected,” Citi economists wrote in a note to clients after Powell’s press conference.
change tune
Futures traders now see a greater than 70% chance that the Fed will begin cutting interest rates by mid-June, with that number rising to more than 85% by the end of July, according to CME Group data.
“We still expect the Fed to deliver its first rate cut in June,” Citi economists wrote, predicting as many as five rate cuts this year if the hot U.S. labor market weakens in the coming months.
Others expect the pace of rate cuts to be less aggressive, with economists at Wells Fargo predicting a total of four cuts this year, the first in June.
“However, risks to our outlook tilt toward the FOMC starting to ease monetary policy later in the summer (at its July 31 meeting), as the committee becomes more optimistic about the outlook for economic activity and more concerned about inflation. Or progress may be slower,” they wrote in a note to clients.
Powell also said on Wednesday that the Fed expected to begin slowing the pace of asset sales “soon” to help the economy weather the Covid-19 pandemic.
Powell said the move would reduce the chance of another liquidity crisis and actually allow the Fed to do more over the longer term to shrink its bloated balance sheet.
“It’s kind of ironic that by slowing down, you can go further,” Powell said. “But that’s the idea.”
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
