The decision to hold the interest rate came after ten consecutive times since last year 2022, during which the Fed raised interest rates.
The Fed preferred to temporarily stop raising interest rates as an opportunity to “assess the situation” after recent increases and with inflation rates slowing.
In an attempt to balance the risks facing the economy and the continued fight against inflation, the Federal Open Market Committee, which sets the interest rate, said in a closing statement to its meeting of the last two days: “Keeping the target The range (interest rates) unchanged at this meeting allows the committee to assess any additional information and its implications for monetary policy. The committee made its decision unanimously.
In a new economic outlook, the Fed indicated that the cost of borrowing will likely rise another half a percentage point by the end of this year, given the strength of the economy relative to expectations and the slowdown in inflation.
The Fed expects the interest rate to reach 5.6% by the end of this year. The Fed raised its growth forecast to 1% this year, while lowering it slightly for the years 2024 and 2025. The Fed believes that inflation rates are “still high” and said it will continue to work to bring them back to their goals. At the same time, he ruled out the US economy entering recession for the current year. The Federal Reserve expected the unemployment rate to hit 4.1% in 2023, up from 4.5% forecast last March. Two main facts
In his analysis of the decision to keep interest rates unchanged, Jay Ritter, visiting professor at the American University of Florida, says in exclusive statements to “Sky News Arabia Economy” that the Federal Reserve’s decision not to Changing the federal funds interest rate reflects several key facts, as follows:
First: the continued decline in inflation rates. Second: the repercussions of the banking crisis.
Regarding the first fact, he points out that US inflation is expected to fall, and therefore “real” interest rates, i.e. the difference between interest rates and inflation, will rise even if nominal interest rates do not change.
On the other hand, the “second fact” from his point of view is that there have been some bank failures in recent months which have been at least partly due to the rapid rise in interest rates.
He adds: Banks that failed had invested in long-term bonds or made long-term fixed-rate loans, and the value of those assets declined when interest rates rose. The Fed fears that some other banks will fail if interest rates are raised further.
fight against inflation
Federal Reserve Chairman Jerome Powell said Wednesday that the bank has come a long way in fighting inflation and that the full impact of monetary tightening will come later. He affirmed the Fed’s commitment to reducing inflation to its 2% target. He also indicated that it would not be appropriate to cut interest rates in the current year. The Fed Chairman pointed out that almost all bank officials expect further interest rate hikes this year. He pointed out that while officials have not decided what they will do about it in upcoming meetings, July’s Federal Open Market Committee meeting could see another interest rate hike. However, he pointed out at the same time that interest is expected to fall by 1% in 2024 and by 2% by the end of 2025. He said: “There is a long way to go to bring inflation down to 2%.
Job evaluation
In addition, Kenneth Kutner, Professor of Economics at Williams College, points out in an exclusive statement to “Sky News Arabia Economy” that the US Federal Reserve’s decision was widely expected, in view of the slowdown in inflation rates, and therefore that it was expected that it would in fact resort to temporarily halting the rate of inflation increase.
He explains that the Fed wants the market to take a break in order to “evaluate the situation” and see the effects of previous price hikes, and if inflation continues to fall, these hikes could be the last.
However, Kutner had also referred to the “recession” scenario that threatens the economy, a scenario that will be accompanied by a set of changes in the direction of the country’s monetary policy, at a time when it seems that the Fed tends to maintain the interest rate.
inflation rate
The annual inflation rate in America continued to fall, during the month of May, for the 11th consecutive month, to its lowest level in more than two years. And data from the Bureau of Labor Statistics, released on Tuesday, showed the annual inflation rate in the United States fell to 4% in May, from 4.9% in April, which was better than expectations. down to just 4.1%. On a monthly basis, the consumer price index rose 0.1% in May, in line with expectations, after rising 0.4% in April. As for the core inflation index – which excludes food and fuel – it slowed for the second consecutive month, registering 5.3%, against 5.5% in April, which was higher than the expectations of a decline to 5.2%. On a monthly basis, the core inflation rate came in at 0.4% in May compared to April, in line with expectations and unchanged from the previous month.
Since March 2022, the Fed’s key rate has been raised by 5 percentage points, to remain between 5 and 5.25%.
inflationary pressures
In addition, University of Massachusetts economics professor Robert Pollen says in exclusive statements to the “Sky News Arabia Economy” site that the Federal Reserve’s decision not to raise the interest rate for first time in 15 months reflects the fact that the inflationary pressures that dogged the US economy have eased.
He adds: “In fact, inflationary pressures have been easing for several months now. The Fed is slowly catching up. Now that the Fed has a chance to catch its breath, it is time for policymakers at the Fed and other government agencies start introducing measures.” alternative to controlling inflation.
Such measures could, according to the American academic’s estimate, include exceptional taxes and stricter enforcement of antitrust laws.
The crux, Poulin points out, is that the main driver of inflationary pressures over the past year has been corporate margins to generate monopoly profits in the face of short-term supply shortages.
recession scenario
Regarding the “recession” scenario that threatened the US economy, Ahmed Moati, CEO of VI Markets, indicated in exclusive statements to “Sky News Arabia Economy” that the recent statements of the Fed were clear, and indicated that the idea of ​​recession had become Especially with the raising of growth expectations to 1%, in addition to raising expectations of a drop in the unemployment rate to 4.1% in 2023, against 4.5% in the expectations of last March , which reflects the improvement in employment.
And he adds: “Yesterday’s statement changed expectations that worried about the recession scenario and tried to confirm that the US economy is strong and consistent,” noting that the impact of this data may seem mixed, especially as the Fed has tried to hold the middle stick as it expects 1% growth amid strong jobs data, but has hinted at an increase in interest rate over the current year, and when asked about it by Federal Reserve Chairman Jerome Powell, he said that “the statement is not binding and our opinion may change if the data improves”.
Moati says a “note of cautious optimism” dominated statements from Powell, who left the door open to both scenarios, in light of the issue being tied to improving data.
And he explains that with the possibility of a downturn in the economy, this decline will be slight, given that the Fed sees an improvement on the horizon and has raised its growth expectations slightly, especially in light of the solid performance, in particular by the artificial intelligence sector.
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