Dear clients,
The US Federal Reserve left interest rates unchanged on Wednesday, but made it clear in new forecasts that borrowing costs may have to rise by half a percentage point by the end of this year as the US central bank responded to a stronger-than-expected economy and a slower decline in inflation.
In a press conference at the end of the central bank’s latest meeting, Fed Chairman Jerome Powell said that US economic and labour market growth was better than expected under the weight of aggressive monetary tightening last year, which will likely lengthen the Fed’s fight to reduce inflation, but also allow it to pass with less economic damage.
According to Powell, the pause was made out of caution to allow the Fed to gather more information before determining whether to raise rates again, with the pace of rate hikes now less important than finding the right endpoint that will slow price growth while minimising unemployment growth.
After a year in which many economists and analysts argued that recession was inevitable and the economy was about to crack, according to the Fed’s latest quarterly outlook „growth estimates have gone up slightly, unemployment estimates have gone down slightly, inflation estimates have gone up,“ Powell said.
The Fed’s rate hike coincides with an improved view of the economy and hence slower progress in returning inflation to the central bank’s 2% target. It is currently more than double that target.
Wednesday’s decision interrupted a string of 10 consecutive rate hikes adopted by the Fed in response to the worst inflation outbreak in 40 years with a corresponding set of aggressive moves, including four excessive hikes of three-quarters of a percentage point last year.
