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Federal Reserve’s Decision to Pause Interest Rates?

Federal Reserve Outlook: Rate Stability

The latest projections from the Federal Reserve Central Bank indicate a decreased likelihood of rate cuts in the upcoming year. The decision is to maintain higher interest rates for an extended period to combat inflation.

This choice keeps the short-term benchmark rate at 5.25%, the highest in 22 years, extending a streak of minimal rate adjustments. It’s only the second meeting during which the Federal Reserve refrains from raising the federal funds rate since their campaign began in March 2022.

Federal Reserve policymakers anticipate a slight quarter-point increase in the federal funds rate later this year, with a projected range of 5.5% to 5.75% in 2023. However, financial markets and many economists are skeptical, believing the Fed is more likely to maintain the status quo for the rest of the year, citing indications of a cooling job market and inflation.

During a press conference, Fed Chair Jerome Powell emphasized that the Federal Reserve has not made a definitive decision regarding further rate hikes and has no urgency to do so. He stated, “given how far we’ve come, we are in a position to proceed carefully.”

Powell expressed satisfaction with the decrease in inflation but stressed the need for sustained evidence of this decline before committing to stable rates, saying, “we want to see convincing evidence that we’ve reached the appropriate level” of interest rates, and that a mere three-month decline in inflation is insufficient.

Looking ahead to next year, Federal Reserve officials anticipate reducing rates to a range of 5% to 5.25%. This is higher than the 4.5% to 4.75% projection made in June, driven by their belief in the resilience of the economy and a gradual easing of inflation. Consequently, rate cuts are likely to commence later in 2024 than initially anticipated.

Powell attributed the forecast of fewer rate cuts next year to stronger-than-expected economic activity, stating, “economic activity has been stronger than we expected,” and emphasized that this necessitates greater reliance on rates. However, he clarified that the Fed would not raise rates further solely due to a robust economy unless they perceive a risk of another inflationary surge.

In their official statement following a two-day meeting, the Fed reiterated its commitment to assessing the timing and extent of additional rate increases required to achieve their 2% inflation target, taking into account the time lags associated with rate adjustments and their impact on the economy, inflation, and financial developments.

Morgan Stanley had anticipated the removal of the word “additional” from the statement, suggesting a decreased likelihood of rate hikes this year.

Furthermore, the Fed upgraded its assessment of the economy, describing it as expanding at a “solid” pace compared to the previous characterization of a “moderate” pace. The statement acknowledged a recent slowdown in job gains but emphasized their continued strength.

Federal Reserve officials are grappling with an economy and job market that are decelerating but proving remarkably resilient despite rising prices and interest rates. Inflation, while slowing, is not decelerating as rapidly as policymakers desire.

Goldman Sachs sees this situation as an opportunity for the Fed to halt rate hikes, potentially preventing a recession, as moderating rent increases in the coming months contribute to a quicker decline in inflation.

However, Barclays anticipates another rate hike due to the Fed’s desire for more definitive evidence of inflation moving closer to 2% and concerns that labor shortages related to COVID and a strong labor market could sustain robust wage growth, which in turn could drive up prices.

By 2024, contrary to the Fed’s projections, some prominent economists believe that officials may be more concerned about a weakening economy than persistently high inflation, leading to more aggressive rate cuts.

Wednesday’s decision to maintain the status quo provides relief to consumers who have faced consistent increases in interest rates for credit cards, adjustable-rate mortgages, and other loans. Nonetheless, Americans, particularly seniors, are finally experiencing healthier bank savings yields after years of minimal returns.

The Fed anticipates that its preferred measure of annual inflation, the personal consumption expenditures index, will remain stable at 3.3% by year-end, slightly above their June estimate. By the close of 2024, consumer price increases are expected to decrease to 2.5%, though still somewhat higher than the Fed’s 2% target.

A core inflation measure, which excludes volatile food and energy prices and is closely monitored by the Fed, is projected to end the year at 3.7%, slightly lower than the previous estimate of 3.9%.

Since the summer of 2022, there has been a notable decline in inflation. However, in August, gasoline costs pushed prices higher, and core inflation accelerated due to rising rent, travel, and other service-related expenses, as indicated by the consumer price index.

The initial reaction of the stock market to the Fed’s decision to maintain interest rates was negative, with indexes declining to session lows.

BTC saw a mild dip, but has remained steady around $27k as of writing.

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