Fed Holds Interest Rates Steady Amid Inflation Concerns

On Thursday, the US Federal Reserve announced its fourth interest rate decision for 2024, maintaining the key benchmark interest rates at 5.25% - 5.50% for the seventh consecutive meeting. This decision aligns with Wall Street estimates and market analysts' expectations.

Despite recent declines in US inflation, the Fed remains cautious about reducing interest rates until it gains greater confidence that inflation is sustainably moving towards its 2% target.Here are five key takeaways from the Fed's latest policy decision:

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1. US Interest Rates at Over Two-Decade High

Since March 2022, the Fed has raised the policy rate by 5.25 percentage points to combat 40-year high inflation. While this has lowered inflation from 9.1% in June 2022 to 3.2%, it has also increased borrowing costs for businesses and households. The Fed aims to balance curbing inflation without triggering a recession, maintaining a stance of requiring "greater confidence" in inflation's decline before cutting rates.

2. Fed Projects One Rate Cut in 2024, Four in 2025

The Fed anticipates only one rate cut in 2024, down from three projected in March, with a median year-end federal funds rate of 5.13%. For 2025, the median estimate is 4.13%, indicating four quarter-point cuts. This reflects a cautious approach among the 19 policymakers, with varying expectations for rate cuts.

3. Slowing Balance-Sheet Runoff

Starting June 1, the Fed will reduce the pace of shrinking its balance sheet, allowing $25 billion in Treasury bonds to run off monthly, down from $60 billion. Mortgage-backed securities runoff will continue at $35 billion per month. This adjustment aims to prevent a reserve shortage in the financial system while maintaining distinct roles for balance sheet and interest rate tools.

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4. Stable Economic Projections

The Fed's updated forecasts project 2.1% economic growth this year and 2% in 2025, with core inflation rising to 2.8% by year-end, up from 2.6%. Unemployment is expected to remain at 4% this year, rising to 4.2% by the end of 2025. These projections suggest a gradual slowdown in the job market while maintaining overall health.

5. Market Reactions

Stocks reached new highs following the Fed's announcement, with continued bets on rate cuts in 2024. The S&P 500 surpassed 5,400 for the first time, and the Nasdaq composite also hit a record high. The US dollar retreated against other developed-world currencies.

In conclusion, the Fed's decision to maintain high interest rates reflects a cautious approach to achieving long-term inflation goals. Adjustments in economic projections and balance-sheet runoff indicate a careful balance to support economic stability without reigniting inflation or causing a recession.

Also Read: Food Inflation Bites Indian Economy: RBI Sees Uptick in Vegetable Prices; Monsoon Key to Relief