Wednesday, November 29, 2023

Federal Reserve holds rates but officials predict more tightening this year -Dlight News

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The Federal Reserve maintained its benchmark interest rate at a 22-year high on Wednesday even as officials signalled support for further monetary tightening this year and fewer rate cuts next year.

The Federal Open Market Committee opted against an interest rate increase following its latest two-day meeting and voted unanimously to hold the federal funds rate between 5.25-5.5 per cent. That was in keeping with the US central bank’s strategy of moving more carefully in the latter stages of its fight against inflation.

Since March 2022, the Fed has pursued one of the most aggressive campaigns to choke off consumer and business demand in decades in a battle against price pressures that have proven far more persistent than expected.

In a statement, the committee said it remained “highly attentive to inflation risks”, noting that economic activity had been expanding at a “solid pace” and that jobs gains, while slower, were “strong”.

The Fed on Wednesday also released a new set of individual economic projections from its officials, which forecasted stronger growth this year and a more benign inflation outlook compared with previous estimates released in June.

The projections, known as the dot plot, also signalled support for the funds rate to peak between 5.5-5.75 per cent — translating to one more quarter-point rate rise this year — while pencilling in fewer interest rate cuts for 2024 and 2025.

But it is far from guaranteed that the Fed will follow through with further tightening. Officials are increasingly focused on the risks facing the world’s largest economy even as they remain alert to the threat of high inflation becoming entrenched.

Officials are also aware that the impact of months of higher interest rates may only be becoming evident now, such as in the cooling of the US labour market. Fresh challenges to growth have also emerged, including the resumption of student loan repayments, an unresolved autoworker strike and a looming government shutdown.

Policymakers are balancing those concerns against data showing that demand across many sectors remains robust, fuelling strong consumer spending and potentially impeding the battle to bring inflation back to the central bank’s longstanding 2 per cent target.

A surge in oil prices stemming from recent supply cuts has also caused concern, amid fears it could lift the costs of goods and services.

Traders in fed funds future markets are betting the Fed will hold rates at current levels until well into 2024. But a recent poll of leading academic economists conducted by the Financial Times and the University of Chicago’s Booth School of Business showed most thought the central bank had more work to do to beat back inflation.

Most of the economists polled believe one more quarter-point rate rise is on the cards, with another large cohort expecting the Fed to deliver two or more increases of that size. The bulk of the respondents think the Fed will not deliver its first rate cut until the third quarter of next year or later.

“Some of the signals that we’re getting are that policy isn’t that tight,” said Julie Smith, a professor of economics at Lafayette College, noting that interest-rate sensitive sectors such as the housing market remained “surprisingly strong” despite having taken an earlier hit.

“It doesn’t seem like there is enough pullback from consumers to slow the economy, and I think that’s really the issue.”

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