When will the change of direction come?: The US Federal Reserve sets the interest rate

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In December, the Fed announced interest rate cuts for 2024. But it may not be that far at their first meeting this year. The latest economic data will likely encourage the US Federal Reserve not to rush things.

The US Federal Reserve (Fed) will announce its decision on the progress of monetary policy this Wednesday (20:00 CET). With inflation easing, the Fed is likely to change course this year.

However, analysts expect further declines in interest rates. Although the central bank promised to reduce interest rates for 2024 at its last meeting last year, the interest rate remained between 5.25 and 5.5 percent, the highest level in more than 20 years. However, experts are likely to wonder what kind of program Federal Reserve Chairman Jerome Powell will determine at the press conference.

Danger of economic recession

The Fed has increased its key interest rate by more than five percent since March 2022 as part of its fight against inflation. Rapid inflation was also caused by the increase in energy prices following Russia’s attack on Ukraine.

With inflation easing, the US Federal Reserve is expected to cut interest rates soon. However, given the strong economic growth, there should be no rush for this. So far, it appears that the Fed has succeeded in slowing down price increases without slowing down the economy. Latest economic data shows that the US economy grew more than expected in the fall.

Keeping inflation under control is the classic task of central banks. The Fed aims for price stability with a 2 percent inflation rate in the medium term. It turns the interest rate screw in the fight against high consumer prices. If interest rates rise, private individuals and businesses will have to spend more on loans or borrow less. Growth is slowing, companies cannot pass on high prices indefinitely, and ideally the inflation rate is falling. But there is also a risk of recession. Finding the right balance is a big challenge for central bankers.

Should we wait until March?

Falling inflation now gives U.S. monetary authorities some leeway. However, Fed Chairman Powell has repeatedly emphasized in the past that the data should be viewed with caution and that we should wait and see whether the decline is permanent. In December, Fed policymakers expected an average interest rate of 4.6 percent this year. This suggests around three rate cuts in 2024. However, experts think that the first interest rate cut cannot be expected until the meeting in March at the earliest. Recent economic data should confirm the Fed’s decision to stick to tight monetary policy for now.

Europe’s perspective

Euro currency watchers also ended the zero and negative interest rate years in the summer of 2022 in order to control high inflation. The European Central Bank (ECB) increased interest rates. “Part of the inflation dynamics in the US and the Eurozone can be attributed to the increase in energy and raw material prices,” International Monetary Fund chief economist Pierre-Olivier Gourinchas said at the presentation of the latest economic report. Report on Tuesday. However, in the Eurozone this shock was much larger than in the USA. “When you consider what might be happening in terms of inflation in the United States, it leads to a slightly different diagnosis,” Gourinchas continued.

He points out that consumer prices in the US have risen so dramatically because of high demand and especially the strong labor market. A strong labor market generally makes it harder for the Fed to fight inflation because it increases wages. Gourinchas warned that inflation could become more permanent if demand in the United States does not decrease. The European Central Bank is concerned about further wage increases and whether lagging wages can catch up to this level without causing further price increases. (SDA)

Source :Blick