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US Federal reserve maintains key interest rate at 23-year high amid inflation concerns


The US Federal Reserve has kept its key overnight interest rate at a 23-year high since July 2023, aiming to hold steady until inflation aligns consistently with target levels. Here’s a breakdown of the recent developments and their implications:

Fourth interest rate decision for 2024

On Thursday, the US Federal Reserve announced its fourth interest rate decision of the year following a two-day Federal Open Market Committee (FOMC) meeting. The committee unanimously voted to maintain the key benchmark interest rates at 5.25% – 5.50% for the seventh consecutive meeting, in line with Wall Street estimates.

Inflation and interest rates

Despite a decline in US inflation towards the target range in recent months, the Fed remains cautious. Officials stated they would not reduce interest rates until they are confident inflation is moving sustainably towards the 2% target. The core inflation forecast for this year has been slightly raised, while GDP growth projections for 2024 remain unchanged.

Economic goals

The Fed aims to achieve maximum employment and maintain a 2% inflation rate over the long term. The committee noted that risks to these goals have become more balanced over the past year but emphasized the ongoing uncertainty in the economic outlook and the importance of monitoring inflation risks.

Consumer price index (CPI) data

Recent government data revealed the annual CPI at 3.3% in May, down from April. The core CPI, excluding food and energy, rose by 0.2% in May and 3.4% year-over-year, the slowest pace since 2021.

Monetary policy tightening

Since March 2022, the Fed has raised the policy rate by 5.25 percentage points in response to rising price pressures, reducing annual inflation from a peak of 9.1% in June 2022 to 3.2%. These rate hikes have increased borrowing costs for businesses and households, presenting a challenge in balancing economic stability and inflation control.

Future rate cuts

The Fed’s current stance is to maintain high borrowing costs to control spending and inflation without derailing the economy. Any premature rate cuts could risk reigniting inflation, especially given geopolitical uncertainties.

Economic projections and balance sheet adjustments

The Fed expects only one rate cut in 2024, according to their latest dot plot. They also plan to scale back the pace of balance sheet reduction, allowing $25 billion in Treasury bonds to run off monthly starting June 1, compared to the current $60 billion.

Economic growth and employment forecasts

The Fed projects 2.1% economic growth this year and 2% in 2025. Core inflation is expected to reach 2.8% by the end of the year, up from a previous forecast of 2.6%. The unemployment rate is forecasted to remain around 4%, indicating a gradual cooling of the job market.

Stock market reactions

Despite the Fed’s cautious outlook, the stock market has reached new highs. The S&P 500 hit 5,400 for the first time, while the Nasdaq composite also saw significant gains. The Dow Jones Industrial Average dipped slightly.

Market bets on future rate cuts

Fed swaps still indicate expectations for rate cuts in November and December, even with the central bank’s more conservative projections.

Federal Reserve is maintaining its high-interest rate policy to control inflation, with cautious optimism about future economic growth and employment stability. Investors and market analysts will continue to monitor the Fed’s actions closely, especially regarding potential rate cuts in the coming months.

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