[ad_1]
The Federal Reserve on Wednesday held its benchmark interest rate steady for the first time in over a year, but senior officials indicated another 50 basis points of rate hikes are on the table if inflation doesn’t slow more rapidly.
“You’re just not seeing a lot of progress,” said Fed Chairman Jerome Powell in a press conference after the Fed decision.
He noted that a key measure of inflation remains sticky and that prior Fed forecasts for a big decline in price pressures have repeatedly been wrong.
Given enduring inflationary pressures, Powell said, the Fed needs to stick to a get-tough approach.
The signal that the Fed was not done raising rates was in the so-called “dot plot” forecast, which showed the benchmark rate rising to a range of 5.5%-5.75%.
The Fed’s prior projected terminal rate was the current range of 5%-5.25%.
Read: Fed sees hardy economy and low unemployment prolonging high inflation
This new rate projection is above what Wall Street economists were expecting while financial markets had only one more rate hike penciled in.
The Fed didn’t specify when it might move, but a hike as soon as the next meeting in July is possible.
“The Fed has more rate hikes up its sleeve with the July meeting deemed ‘live’ by Chair Powell,” noted deputy chief economist Michael Gregory of BMO Capital Markets.
Powell said he Fed decided not to raise rates at its latest meeting on Wednesday to give it more time to assess the effects of prior increases on the economy and avoid overdoing it. The central bank has jacked up a key short-term interest rate to 5% from near zero just 14 months ago.
“It may make sense for rates to move higher, but in a more moderate pace,” Powell said. “We are trying to get things right.”
Powell also said the conditions are in place for inflation to fall somewhat more rapidly even if progress so far has been slower than senior Fed officials would like.
The Fed’s economic forecasts suggested otherwise, however, and was more pessimistic about its progress on lowering inflation.
The Fed now expects its favorite inflation measure, the core personal consumption expenditure price index, to end the year at a 3.9% annual rate, up from the prior forecast of 3.6%. It was running at a 4.7% rate in April.
With inflation too high, the Fed wants to raise interest rates enough to cool inflation without causing a severe economic downturn. Officials are split over how to achieve this goal, however.
Nine Fed officials expect the benchmark rate to rise to the the 5%-5.75% range. Three expect even more hikes. Four officials penciled in only one more rate increase. Only two officials thought the Fed may have already done enough.
The Fed staff is forecasting a mild recession beginning in the fourth quarter. Most economists also expect a recession but hope it will be mild.
The best outcome would be continued slow economic growth or a very quick downturn — known as a soft landing.
“There is a path to getting inflation back to 2%” without experiencing a recession, Powell said.
The economy has remained resilient despite the 500 basis points of rate hikes engineered over the past 15 months. The labor market remains particularly strong.
The unemployment rate rose to 3.7% in May. Fed officials now expect the unemployment rate to rise to 4.1% by the end of the year, down from their prior forecast of a 4.5% rate.
“The Fed needs the labor market to cool more quickly,” said chief economist Ryan Sweet of Oxford Economics.
According to the dot plot forecasts, no Fed officials expect a rate cut until next year.
The central bankers have very diverse views about where rates will be at the end of 2024. The median view expects 100 basis points in cuts, while six of the 18 Fed officials see rates holding above 5%.
[ad_2]
Source link
