The Federal Reserve made an unexpected cut in interest rates by 50 basis points, surprising the market, even though the probability of such a move was estimated at 65%. In addition to this decision, the Fed significantly lowered its forecasts for interest rates for 2024 and the following years. The Committee aims to achieve maximum employment and inflation at 2% in the long term. The Fed gained greater confidence that inflation is moving toward this goal in a balanced way, and it assesses that the risks associated with achieving its goals are balanced. However, economic prospects remain uncertain, which makes the Committee carefully monitor the risks for both inflation and employment.
In the face of progress in fighting inflation and balancing risks, the Fed decided to lower the target range of the federal funds rate to 4.75%-5%. In considering further changes in monetary policy, the Committee will carefully analyze incoming data, economic outlook, and balance of risks. Additionally, the Fed continues to reduce its resources in the form of treasury bonds and mortgage-backed securities. The Committee is strongly committed to supporting full employment and returning inflation to the 2% level.
The decision to cut interest rates was voted by Jerome H. Powell, chairman of the Fed, and other committee members, except for Michelle W. Bowman, who preferred a smaller cut of 25 basis points.
The Fed expects two more interest rate cuts this year, with a median of 4.4%, while previous forecasts indicated 5.1%. 4-5 further cuts are forecast for 2024, with a median of 3.4% (previously 4.1%). In 2026 and 2027, the Fed foresees interest rates at the level of 2.9%.
Inflation forecasts for this year have been lowered, with PCE at 2.3%, and core PCE at 2.6%. The Fed also expects an increase in the unemployment rate to 4.4% in 2024, but in subsequent years, it is to be 4.2%. At the same time, the Fed does not predict a labor market crash. GDP growth in 2024 is forecast at 2.0%, suggesting a possible “soft landing” for the economy.
The decision was positively received by the market, given the stable economic forecasts and an aggressive path of interest rate cuts, indicating a win over inflation and support for the job market.
Source: https://managerplus.pl/fed-zaskakuje-agresywnym-cieciem-stop-procentowych-i-sygnalizuje-dalsze-obnizki-43447
