Economy: The Fed Surprises Expectations and Maintains its Interest Rates

The decision of the U.S. Federal Reserve regarding the interest rate cut was highly anticipated. The Fed defied the predictions of some analysts by maintaining them at their current level. A prudential choice that could change as the inflation of the American economy slows down to 2%.

No change to the Fed’s interest rate cut

The interest rates set by the Fed will be neither increased nor decreased. The last meeting of the financial institution decreed their maintenance at the current level between 5.25% and 5.50%. It is the first time since 2001 that the rates have remained at such a high level.

This is not good news for investors who were betting on a reduction of these rates. However, the Fed now anticipates three rate cuts in 2024, confirming its previous forecasts. Nonetheless, this economic outlook is conditional.

Such an option will only be considered if inflation shows signs of stabilization towards the target of 2%. So far, the inflation figures are higher than expected at the start of the year. But the Fed remains confident that inflation will normalize towards this target.

In any case, Jerome Powell, the chairman of the Fed, was very clear. Speaking about the decision to maintain rates at their current level, he emphasized the need for confidence in the economy before any adjustment. He did not specify any timeline for this.

Federal Reserve holds interest rates steady, maintains forecast for 3 rate cuts in 2024 https://t.co/xgDvAa5hal via @YahooFinance

— Richard Blackwell (@BlackwellSC) March 20, 2024

June, new economic target for a rate hike?

Despite this uncertainty, investors, particularly in crypto, hope for a rate reduction by June, which has stimulated optimism in the market. This hope seems to be related to the Fed’s predictions for the American economy in 2025.

It indicates a slight decrease in rate reductions compared to previous forecasts, as well as an increase in inflation projections to 2.6%. Concurrently, the Fed’s forecasts for 2024 are optimistic, with growth expected at 2.1% and an unemployment rate projected at 4%.

For the most part, the institution remains attentive to inflationary pressures while emphasizing its commitment to managing risks. Despite high levels of inflation, the core personal consumption expenditures index shows positive signs.

This illustrates the Fed’s nuanced approach in interpreting inflation data. As the institution has adjusted its expectations for the long-term neutral rate to 2.6%, reflecting its assessment of economic conditions favorable to balanced growth. We see that, in the end, the Fed is working to support the growth of the economy while managing inflationary pressures and market risks.