The Fed decides to stop interest rates. «Inflation slows down but not enough»- Corriere.it

For the first time in 15 months, the Federal Reserve is leaving US interest rates unchanged, having risen from zero to over 5%, with ten consecutive hikes starting in March 2022. The pause, decided unanimously yesterday, allows the central bank to measure the impact of the tightening carried out so far before new interventions. Holding the rate firm at this meeting allows the Committee to evaluate additional information and its implications for monetary policy, Fed Chairman Jerome Powell said. But he added that almost all the participants in the Committee predict that it will be Interest rates should be raised further by the end of the year, signaling the likelihood of two more hikes.

The news immediately pushed Wall Street lower (the Dow Jones closed down 0.68%while the Nasdaq rose by 0.39%) and pushed up the yield on two-year Treasury securities, the most sensitive to anticipate the Fed’s actions, from 4.62% to 4.77%.

How much more will US rates go up? The new Fed forecasts indicate that the cost of money will increase to about 5.6% at the end of this year, anticipates Powell, half a percentage point more than the March estimates. While at the end of 2024 the Fed expects rates to drop to 4.5% and then to 3.4% in 2025.

The new estimates indicate an American economy more resilient than expected: it will grow by 1% this year, up from a meager 0.4% expected in March, and 1.1% in 2024. The job market also remains very tight and participation has increased, Powell says. The data on unemployment has also been corrected from 4.5 to 4.1% at the end of the year.

THEThe problem is that inflation is still too high, far from the long-term 2% target: in May it fell to 4% from 4.9% in April, at the lowest level for over 2 years, after the peak of 9.1% reached last June. A sign that aggressive monetary tightening is starting to work, albeit more slowly than expected. Inflation has moderated, but we still have a long way to go, acknowledged the lawyer—banker. The new projections indicate that the consumer price index will fall to 3.2% at the end of the year, to 2.5% in 2024 and to 2.1% in 2025 alone. But core inflation, which excludes volatile prices of food and energy, continues to rise: in May increased by 5.3% compared to a year ago. We don’t see much progress, Powell admits.

The Fed will do everything possible to bring inflation back to 2%, Powell repeated over and over because the rise in prices affects the purchasing power of all families, but especially penalizes the most fragile, because they have to cope with the increases in basic needs such as food, housing and transport. The risks of doing too much are balancing out against those of doing too little, but the inflation risks are still on the upside, Powell said. And he is keen to clarify that the question of the speed of increases is different from the question of the level of interest rates: Last year speed was important; as we get closer to the goal, it is appropriate to moderate the pace.

What will happen at the next meeting of the Monetary Policy Committee in July? Decisions will be driven by data, Powell insists. To guide its choices, the Fed will take into account the cumulative tightening of monetary policy, the lags with which it affects economic activity and inflation, and economic and financial developments, Powell explains. We will look at the evolution of the risk map, the financial sector, the labor market and inflation. The variables are many. The impact of the banking crisis in March, with the failure of three banks in one week, is not yet fully known. We are watching it and will factor it into our monetary policy decisions, Powell argues. We are trying to do things right, the president of the central bank repeats twice. Aware that the rate hike is putting the banks involved in the credit relating to commercial real estate are also at riskthere. We’re monitoring it closely, she says.

At the same time, the central bank will continue to downsize its encumbered balance sheet, augmented by Treasuries and mortgage-backed bonds purchased to prop up the economy.

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