Fed announces interest rate decision

Decision follows months of sticky inflation prints and slower than expected economic growth

Fed announces interest rate decision

The United States Federal Reserve has decided to hold its benchmark federal funds rate steady between 5.25 and 5.5 per cent. The move was widely predicted by economists and analysts going into the Federal Open Market Committee (FOMC) meeting but reflects a change in tone from the start of 2024. At the end of 2023, Fed Chair Jerome Powell all but promised three interest rate cuts this year, which many predicted would begin in spring. Stubbornly high inflation prints in recent months, however, appear to have prompted Powell’s decision to hold yet again.

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective,” the press release announcing the decision reads.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

Stronger than expected US consumer demand over recent months has been a significant contributor both to US GDP growth and the persistence of inflation. More recently we have also seen services inflation stay high, which is a harder inflation metric to predict. There has also been a relatively slow decline in shelter inflation which contributes to the Fed’s wariness.

US GDP growth did underperform expectations in Q1 of this year, slowing to a growth rate of 1.6 per cent. Ahead of the meeting, however, analysts surveyed by WP said that this slower growth number did not imply the kind of consumption slowdown that should act against inflation. The details behind that GDP number, they emphasized, were better than the headline.

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the release reads. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

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