Interest rate cut coming?: Fed decides the course of monetary policy

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The US Federal Reserve may be on the verge of a rate pause after ten consecutive rate hikes. The Federal Reserve’s (Fed) decision on the future course of monetary policy will be announced this Wednesday (20:00 CEST). Analysts assume that the world’s largest economy will leave the central bank’s base interest rate unchanged in the 5.0 to 5.25 percent range. This is the highest since 2007 – that is, before the onset of the global financial crisis.

The Fed should be given a headwind by the new inflation data. Accordingly, the rise in consumer prices in the USA significantly weakened in May. It increased by 4.0 percent compared to the same month of the previous year. The rate was still 4.9 percent in the previous month. The current rate is the lowest since March 2021. In the fight against high inflation, the central bank preferred 0.75 point rate hikes, some of which were notable. Recently, however, the Fed has slowed the pace significantly. It will also release an updated economic forecast on Wednesday.

Fed Chairman Jerome Powell opened the door to a possible rate hike after the May meeting, but did not make any commitments. It also made it clear that no rate cuts are expected in the foreseeable future.

Keeping inflation under control is the traditional duty of central banks. If interest rates rise, private individuals and the economy will have to spend more on loans or borrow less. Growth is slowing, companies cannot roll over higher prices indefinitely, and ideally, the inflation rate is falling. There is also the risk of the economy stalling.

New inflation data give hope that the Fed’s tight interest rate policy is starting to bear fruit. However, the inflation rate is still far from the Fed’s average target of 2 percent.

Since the beginning of 2022, the Fed has been betting on rate hikes at a pace not seen in decades. However, this may not have taken its full effect yet, as interest rate hikes are delayed. The rate pause may now be an opportunity for the Fed to give itself some time to observe the lasting effects of its tight monetary policy.

Powell recently made it clear that the recent turbulence in the banking sector due to more cautious lending could have a similar effect to interest rate hikes.

In the last few meetings, central bankers have also had to weigh in between calming worried markets and tackling high consumer prices. Because the Fed’s aggressive rate hikes triggered some of the banking turmoil. The petty-money household goods that have stumbled over the past few months have collapsed – also because they haven’t adequately prepared themselves for rising interest rates.

(SDA)

Source :Blick