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Federal Reserve keeps interest rates on hold, signals three rates cuts in 2024

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By Imelda Cotton - 
US Federal Reserve holds interest rates steady

The US Federal Reserve has left benchmark interest rates at a 23-year high in light of expanding economic activity and a low unemployment rate.

The country’s central bank has maintained the federal funds rate in a range of 5.25% to 5.5% since July, saying it was “not appropriate” to make any cuts until it was confident that inflation was moving towards the 2% goal.

“Recent indicators suggest that economic activity has been expanding at a solid pace,” it said in a statement.

“Job gains have remained strong and the unemployment rate has remained low… inflation has eased over the past year but remains elevated.”

Experts say US inflation is sitting at slightly above 3% on an annual basis and average prices remain well above where they stood three years ago.

The figures are reported to have cooled from a high of more than 9% in June last year but increased slightly in February as the cost of shelter, airline fares, clothes and other items continued to climb.

Double-edged sword

Federal Reserve chair Jerome Powell pointed to “stubbornly persistent inflation” at the start of this year, adding that the bank did not want to make premature cuts and risk a flare-up.

He indicated in congressional testimony last week that the bank was inching closer to making a cut. However, he offered no hints on the exact timing, other than the outlook remained for three rate cuts during the year.

In considering a cut, the bank faces two roughly equal risks — striking too soon could result in a “reversal of progress” in reducing inflation, while moving “too late or too little” could weaken the economy.

“We are looking for data that confirms the low readings we had last year and gives us a higher degree of confidence that what we saw was really inflation moving sustainably down to 2%,” Mr Powell said.

He reiterated that policymakers would be willing to make a cut before year’s end, assuming economic growth continues.

“We believe that our policy rate is likely at its peak for this type of cycle and if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year,” he said.

Price pressures

US inflation rose 3.2% in February on an annual basis, driven by ever-increasing fuel and home prices.

That’s up from the 3.1% increase in January.

“We are not going to overreact to these two months of data, nor are we going to ignore it,” Mr Powell said this week.

Economic strategists also predicted the central bank would bide its time on rates.

“Unless inflation starts to drop and come in below forecast, we expect the Federal Reserve to take a patient and measured approach to potential rate cuts,” one said.

“If there is any notable weakness in the jobs market, that would increase the chance of a rate cut by June.”

Wait-and-see approach

“Powell has perhaps shown his cards: he needs a good reason not to cut rates, rather than a reason to cut them,” said a chief strategist with US-based Principal Asset Management.

“The bank really wants its soft-landing ending… stronger growth, lower unemployment, higher inflation and yet still no change to the median dot.”

“We must all brace for interest rates to remain higher for longer than many have hoped… this is the new normal,” another analyst said.

“With the economy projected to grow, policymakers can afford to adopt a wait-and-see approach.”

The Federal Reserve’s economic outlook pegs the median federal funds rate at 4.6% by year’s end.