Money

US Fed pencils in one interest rate cut this year


The US Federal Reserve has signalled that it will cut its key interest rate just once this year despite inflation easing.

Back in March, the central bank had been expected to reduce borrowing costs three times by the end of 2024.

However, on Wednesday, new forecasts from Fed officials who make decisions on rates pencilled in a single reduction.

The new outlook emerged after the Fed voted to hold interest rates at their current 23-year high even as inflation ticked lower.

Inflation, which measures the pace of price rises, slowed to 3.3% in the year to May. That compares with 3.4% in the 12 months to April.

However, between April and May inflation was unchanged and it remains above the Fed’s 2% target.

Jerome Powell, chair of the Federal Reserve, said that only “modest” progress had been made on hitting the target and the central bank would need to see “good inflation readings” before interest rates can be cut.

US interest rates were held at 5.25%-5.5%.

Anastassia Fedyk, assistant professor of finance at Haas Business School at the University of California Berkeley, told the BBC’s Today programme: “We did get some good news in terms of better inflation numbers.

“But the Fed is still being pretty cautious so they are signalling that in the future they are going to be doing one, most likely, rate drop and not a very large one at that.”

Some analysts suggested that the central bank would backtrack on the number of interest rate cuts this year.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that reducing forecasts of interest rate cuts from three to one this year was “unnecessarily aggressive”.

While economists at Wells Fargo said it would be a “close call” between making one or two reductions in 2024.

Forecasts from the US Fed signalled one modest cut to 5%-5.25%.

Mr Powell acknowledged that a reduction of this size would not have a major impact on the US economy.

But he said when a cut finally does come it would be “a consequential decision for the economy” which “you want to get right”.

While inflation eased a little, the US employment market remains robust. Recent data showed that US employers added 272,000 jobs in May – far above the 185,000 expected.

Ms Fedyk said: “The Fed is trying to react to the data but not overreact to the data.”

Some other major economies have cut interest rates, including the European Central Bank and the Bank of Canada.

But the US – and the UK – are yet to make a similar move. The Bank of England will meet next week and is widely expected to hold interest rates at 5.25%, their highest level for 16 years.

The Consumer Prices Index measure of inflation has slowed significantly in the UK from a high of 11.1% in October 2022 to 2.3% currently.

However, some elements of inflation remain stubbornly high. At the same time, average wage growth in the UK remains strong compared to inflation.



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