On Wednesday, the Federal Reserve said that, for the seventh consecutive meeting, it would maintain the benchmark lending rate at its present level. However, the central bank did not decrease rates as much as first anticipated.
That implies interest rates on all types of loans, including mortgages and auto loans, will stay high.
The most recent economic forecasts indicate that officials have penciled in a single rate decrease for this year, down from three predicted in March. Another prediction they made in the spring was that inflation would be more difficult to control this year.
“Definitely a better inflation report than almost anybody expected,” said Federal Reserve Chair Jerome Powell of the May CPI, which was issued earlier on Wednesday. He did mention that policymakers are still waiting for inflation to drop a little further before they consider decreasing borrowing rates.
One rate decrease this year is all the Fed is planning
Following a vigorous rate-hiking campaign that began in March 2022, the Federal Reserve has maintained interest rates at a 23-year high for about one year. The economy’s resiliency has kept central bankers comfortably on hold as they await more indications that inflation is moving toward 2%. Once the Federal Reserve determines that inflation has leveled down and will not rise again, or if the employment situation worsens more than anticipated (which is unlikely given the present state of affairs), they will start reducing interest rates.
Compared to the first quarter, the inflation situation has improved: The Labor Department said on Wednesday morning that consumer prices decreased in May. Inflation increased by 3.3% year-over-year in May, which was lower than both April’s 3.4% increase and the estimates of experts.
While the Federal Reserve’s May statement acknowledged a “lack” of improvements, the most recent policy statement reflected “modest further progress” toward the central bank’s 2% inflation objective.
The May inflation figure was deemed “encouraging” by Powell.
In addition to praising Wednesday’s inflation data as a “good reading,” the head of the Federal Reserve stuck to his stance that interest rates are “restrictive” enough to limit price increases.
As an example, Powell cited the significant improvement in the second half of last year. However, he did mention that policymakers’ current outlook is one of “it’s probably going to take longer to get the confidence needed to loosen policy,” as opposed to their March thinking. The predictions made by the authorities were spot on.
May saw a slowdown in inflation, which bodes well for consumers.
To bring inflation closer to the Federal Reserve’s 2% objective, Powell cited “the unwinding of the pandemic-related distortions to both supply and demand” as the source of slower inflation.
Restrictive monetary policy “complements, amplifies, and supports that,” he said, explaining how the two were interdependent. As a result of our present [policy] approach, we have achieved reasonable success in reducing inflation.
Reducing rents will eventually show up in official inflation indicators, according to economists. A major component of the CPI that remains persistently high is housing costs: Housing costs increased by 0.4% for the fourth consecutive month, more than making up for the 0.1% drop in gas prices recorded last month, according to the May CPI.
You need not be worried about finding work.
In order to keep inflation on track to 2%, Powell has repeatedly said that the labor market need probably go back “into better balance.” This is due to the fact that the Federal Reserve may find it more difficult to thwart inflation if the labor market continues to run hot, which might lead to price increases.
In May, the US economy created an incredible 272,000 jobs.
When asked about the state of the job market, Powell said, “Overall, a broad set of indicators suggest that conditions in the labor market have returned to about where they stood on the eve of the pandemic, relatively tight but not overheated” during Wednesday afternoon’s press conference that followed the meeting.
In support of this claim, he cited statistics showing: a narrowing jobs-to-workers ratio; job additions of 218,000 per month in April and May; low unemployment rates; slower pay growth; and job creation driven by more prime-aged workers and immigrants trickling into the workforce.
In addition to the obvious inflationary effects, Congress has specifically charged the Federal Reserve with achieving full employment, therefore the economy is a primary priority of the central bank. Powell didn’t seem worried about the possibility that the Fed might contemplate lowering rates in the event of an unanticipated weakening of the labor market.
Gradual cooling and movement toward a better equilibrium are what he described. “We’re keeping a close eye on it in case there’s any indication of anything more than that, but so far, nothing has turned up.”
September for the first rate reduction?
After the May CPI report, futures chances on the first rate decrease by the Federal Reserve increased significantly, and September is now the best bet on Wall Street. Still, it can’t occur unless inflation keeps falling in the months ahead.
The government often claims to be “data dependent” and jumps to economic conclusions when data spanning months shows a pattern. While the May CPI did provide some respite, it is still unknown if the underlying causes that led to higher-than-expected inflation earlier this year are still at work.
The assumption that factors contributing to inflation in the first quarter did not reflect the realities of present-day cost constraints required confirmation. Moody’s Analytics analyst Matt Colyar wrote on Wednesday that May’s data offers significant evidence on that front. “Waiting a few more months until inflation falls further” is the Fed’s banking strategy.
Companies in the United States are still actively recruiting new employees, which means that the employment market is also doing well for the time being. Some US shoppers are clearly feeling the heat, however. Americans are feeling the pinch of the highest interest rates seen in over 25 years as soaring inflation eats away at their budgets, as savings dwindle. Borrowers keep piling on debt.
