Fed Reserves to hold rates steady amid inflation concerns
In the "May Day" week across the ocean, something significant happened. The U.S. Federal Reserve maintained the primary interest rate in the range of 5.25-5.50 percent. This marks the sixth consecutive decision to keep the cost of money at an unchanged level.
On Wednesday, the American FOMC kept interest rates steady. Although Fed Chairman Jerome Powell indicated that they will remain high for a prolonged period, according to analysts, "for market sentiment, the crucial assurance was that the next step would likely not be an increase."
Inflation in the USA still poses a threat
As mentioned in the statement following the meeting, the Fed assessed that "no further progress has been made recently in reaching the inflation target". Powell mentioned that rate reductions will only happen once the Federal Open Market Committee (FOMC) is convinced inflation is on a path toward 2 percent over the medium term. He added that this is likely to occur later than previously expected.
The Federal Reserve Chairman highlighted that a decrease in rates would also be justified if an unexpected worsening in the labour market conditions were to happen. Meanwhile, he evaluated that "data indicating a return to the inflation target will surface within this year, but he does not assert that rate reductions will occur in 2024".
Powell: we are not afraid of stagflation, but future decisions depend on the data
Powell emphasised that he is not concerned about stagflation, pointing to the robust growth in productivity and potential of the American economy. He mentioned, "Monetary policy is restrictive, and the current rate level is suitable for the economy, and he sees no grounds for their hike." He reiterated that further Fed decisions will hinge on incoming data, which the FOMC evaluates comprehensively.
Moreover, as stated in the announcement, "the Fed plans to decelerate the pace of balance sheet reduction from June as previously scheduled". The monthly cap for scaling down the Treasury bond portfolio will be decreased from $60 billion to around £20 billion, while the limit for the downsizing of MBS remains unchanged at about £28 billion.
It appears that in terms of interest rates, Europe might surpass the United States. While the European Central Bank has not yet lowered interest rates, analysts are confident about the high likelihood of a reduction in June.
