- Author, Charlotte Edwards
- Role, BBC business journalist
The US Federal Reserve has announced that it will only cut its key interest rate once this year, despite slowing inflation.
Last March, the central bank was expected to cut borrowing costs three times by the end of 2024.
However, on Wednesday, new forecasts from Fed officials who make rate decisions call for just one cut.
The new outlook came after the Fed voted to keep interest rates at their current 23-year high even as inflation falls.
Inflation, which measures the pace of price rises, slowed to 3.3% in the year ended in May. This compares to 3.4% in the 12 months to April.
However, between April and May, inflation was unchanged and remains above the Fed’s 2% target.
Federal Reserve Chairman Jerome Powell said only “modest” progress had been made toward the goal and that the central bank would need “good inflation numbers” before it could cut interest rates .
US interest rates were held between 5.25 and 5.5%.
Anastassia Fedyk, assistant professor of finance at the Haas Business School at the University of California, Berkeley, told the BBC’s Today programme: “We have received some good news in terms of better inflation numbers.
“But the Fed remains quite cautious and is therefore signaling that in the future it will very likely cut rates, and not a very big one at that.”
Some analysts have suggested the central bank will dial back the number of interest rate cuts this year.
Ian Shepherdson, chief economist at Pantheon Macronomics, said cutting interest rate cut expectations from three to one this year was “unnecessarily aggressive”.
While Wells Fargo economists said it would be “difficult” to achieve one or two reductions in 2024.
U.S. Fed officials were divided on how many interest rate cuts they expected this year. Of the 19 policymakers who gave their outlook, four predicted no reductions, seven predicted one reduction and eight thought there would be two.
The US Fed forecasts show a slight decline of 5 to 5.25%.
Mr. Powell acknowledged that a reduction of this magnitude would not have a major impact on the American economy.
But he added that when a reduction finally comes, it would be “a significant decision for the economy” and “you want to take it well.”
Even though inflation has eased somewhat, the US job market remains robust. Recent data showed that U.S. employers added 272,000 jobs in May, well above the 185,000 expected.
Ms. Fedyk said, “The Fed is trying to respond to the data, but not overreact.”
Some other major economies have cut interest rates, including the European Central Bank and the Bank of Canada.
But the US – and the UK – have yet to make a similar decision. The Bank of England meets next week and is expected to keep interest rates at 5.25%, their highest level in 16 years.
Consumer Price Index (CPI) inflation has slowed significantly in the UK, from a peak of 11.1% in October 2022 to 2.3% currently.
However, some elements of inflation remain stubbornly high. At the same time, average wage growth in the UK remains strong relative to inflation.
Earlier this week, Ruth Gregory, deputy chief economist at Capital Economics in the UK, said: “Overall, sticky wage growth may not prevent the Bank from cutting interest rates. There’s interest first in August, as we expect, as long as other indicators like wage settlement data and next week’s CPI inflation release show decent progress.
Gn headline
News Source : www.bbc.com
