FED maintains interest rate cuts despite rising inflation in the US

The Federal Reserve continues to adhere to its path of interest rate cuts despite recent news of rising inflation in the United States. This increase has not affected the message from Fed Chairman Jerome Powell that price pressures will continue to ease or that it is likely to appropriately lower rates at some point this year. Accordingly, most officials of the US central bank have signaled that they still expect three rate cuts by the end of this year.

Speaking after the two-day Fed meeting, Powell also stated that it would be appropriate to soon slow the pace at which the Fed reduces the number of bonds in its portfolio. However, according to their latest economic projections, nearly half of Fed officials would prefer to proceed with rate cuts at a somewhat slower pace, and it is clear that policymakers need more data confirming a downward trend in inflation before beginning to lower borrowing costs.

– Powell’s core message is that the fundamental story has not changed. We did not fully grasp how good the inflation data was in the second half of last year, and we were not completely discouraged by the poor inflation readings in January and February – said former president of the Fed’s New York office and Bloomberg Opinion columnist Bill Dudley.

After better-than-expected data in the second half of 2023, Fed officials began discussing the timing and pace of interest rate cuts, but the acceleration of key price indicators at the beginning of this year muddied that picture.

Powell has largely ignored reports of higher inflation, and traders increasingly believe that the Fed will begin cutting rates in June. As a result, the S&P 500 index of US stocks reached record levels in recent weeks.

Specifically, officials unanimously decided to keep the benchmark interest rate at 5.25 to 5.5 percent, the highest level in the past 23 years, but projected only three cuts in 2025, while they announced four cuts for the following year in December.

The Fed’s statement after the meeting was almost identical to January’s, maintaining guidance that a rate cut would not be appropriate until officials have more confidence that inflation is sustainably moving toward their target of two percent. All of this implies that interest rates will remain at higher levels for a longer time.

The European Central Bank, on the other hand, attempted this week to ease speculation about a series of rate cuts, although it acknowledged encouraging data on slowing price and wage growth. Many monetary policymakers at this central bank hinted that the first rate cut could be in June, and the discussion is now focused on how many cuts will follow in the upcoming period. However, ECB President Christine Lagarde stated that the central bank cannot commit to a specific rate cut even after the start of rate reductions.

– Our decisions will depend on inflation data. This implies that even after the first rate cut, we cannot pre-commit to a specific rate – Lagarde said at a press conference after the meeting on Wednesday.

It is worth noting that inflation in the eurozone fell to 2.6 percent last month, and ECB President hinted that this decline is likely to be ‘more permanent and less tied to commodity prices’ than before, due to the expected decline in core inflation, which will remove volatile food and energy prices.

She also welcomed ECB data showing that annual wage growth slowed from 4.4 percent in January to 4.2 percent in March.

On the other hand, economic growth in the eurozone has stagnated, and the governor of the Spanish central bank Pablo Hernandez de Cos stated that there is some evidence that the ECB’s interest rate hikes have had a greater impact than expected.

– We will carefully monitor the materialization of such risks and calibrate the degree of monetary restriction accordingly – de Cos said at a press conference.

Lagarde also noted that the slowdown in wage growth, the additional decline in inflation, and new internal projections confirm that price growth is returning to the targeted two percent.

– If this data reveals a sufficient degree of alignment between the trajectory of core inflation and our projections, and assuming that transmission remains strong, we will be able to make policy less restrictive – Lagarde concluded.