US Federal Reserve Maintains Rates at 23-Year High Amid Inflation Concerns

US Federal Reserve Maintains Rates at 23-Year High Amid Inflation Concerns

The US Federal Reserve, concluding its third interest rate decision of 2024 after a two-day Federal Open Market Committee (FOMC) meeting, has opted to maintain its key benchmark interest rates at a historic 5.25 per cent - 5.50 per cent range. This decision marks the sixth consecutive meeting where rates have remained unchanged, aligning closely with Wall Street's and market analysts' expectations.

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1. US Interest Rates at Over 2 Decade-High

Since March 2022, the Fed has initiated an assertive monetary policy tightening cycle, elevating the policy rate by 5.25 percentage points, a swift response to escalating price pressures reaching a 40-year peak. However, the central bank has maintained this rate since July 2023. While these rate hikes have contributed to a decline in annual inflation from its peak of 9.1 per cent in June 2022 to 3.2 per cent, they have also notably increased borrowing costs for businesses and households.

 2. US Fed to Not Cut Rates Until Inflation Cools

Despite a year-long trend of easing inflation, the US central bank highlights that inflation remains elevated. In its statement, the Fed acknowledges a lack of progress towards its two per cent inflation objective in recent months, indicating a stalling economic balancing process. Chair Jerome Powell emphasised the need for "greater confidence" in sustained inflation reduction before considering rate cuts, a sentiment echoed in the policy statement.

 3. Fed to Slow Down Pace of Balance-Sheet Runoff Starting in June

Effective June 1, the Federal Reserve will decrease the pace of its balance sheet reduction, limiting the runoff of Treasury bonds to $25 billion monthly, down from the current $60 billion. Notably, mortgage-backed securities will continue to decrease at a rate of up to $35 billion per month. This adjustment aims to prevent a shortfall of reserves in the financial system, particularly following the lessons learned from the Fed's previous quantitative tightening in 2019.

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 4. Fed's Economic Projections from March Policy Verdict

In its March policy verdict, the Fed revised its economic forecasts, notably upgrading the US growth outlook for the year to 2.1 per cent, up from 1.4 per cent in December. While headline inflation forecasts remained unchanged, projections for annual core inflation saw a slight increase to 2.6 per cent. Additionally, the unemployment rate projection for 2024 was revised downward to four per cent, reflecting ongoing strength in economic activity and employment.

 5. Wall Street Reacts to Powell's Remarks, Yields Rise

Following Federal Reserve Chair Jerome Powell's remarks indicating an unlikelihood of imminent interest rate hikes, Wall Street experienced a surge in stocks. Major indices saw gains of around one per cent or more, with the Dow Jones Industrial Average up 1.2 per cent, the S&P 500 rising one per cent, and the Nasdaq Composite Index jumping 1.5 per cent. Concurrently, the bond market witnessed an upsurge, with Treasury yields climbing across the US curve, underlining the market's response to Powell's statements and the Fed's balance sheet adjustments.

The US Federal Reserve's decision to maintain rates at a 23-year high underscores its continued vigilance against inflationary pressures, prioritizing economic stability amid ongoing uncertainties in the global economic landscape.

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