US Federal Reserve to maintain rates amidst debate over future cuts

The US Federal Reserve is anticipated to provide further insights on Wednesday regarding potential interest rate cuts for the remainder of the year, yet it is highly probable that the key lending rate will remain unchanged for the immediate future.

The Federal Open Market Committee (FOMC), responsible for setting rates, will convene for two days of deliberation, culminating in the publication of its interest rate decision on Wednesday, along with an updated summary of economic projections (SEP) outlining policymakers’ expectations for interest rates beyond 2024.

Having elevated its key lending rate to a 23-year high, ranging between 5.25 and 5.50 percent, the US central bank aims to tackle persistently high inflation, seeking to stabilize it at its long-term target of two percent. Despite last year’s success in curbing inflation and avoiding recession, 2024 has posed challenges, with a slight uptick in monthly inflation prompting concerns that interest rates may need to remain elevated for a prolonged period to address pricing pressures.

Market sentiment regarding central bank easing in 2024 has tempered since the beginning of the year, with expectations shifting. Initially, policymakers indicated a median expectation of three quarter-percentage-point rate cuts for the year, sparking hopes for early action. However, cautionary statements from Fed officials in subsequent weeks, emphasizing data dependency in decision-making, have pushed back market expectations for rate cuts from March to potentially June or later.

Current projections suggest a likelihood of the Fed initiating interest rate cuts by mid-June, with expectations increasing to nearly 80 percent by the end of July. Economists anticipate a reduction in the forecasted number of rate cuts from three to two, although some anticipate the possibility of three cuts by the end of the year, resulting in a 0.75 percent decrease from the current rate.

Following the rate decision announcement, Fed Chair Jerome Powell is expected to field questions, primarily concerning the trajectory of interest rate adjustments. Discussions may also revolve around the Fed’s balance sheet, particularly regarding the timing of reducing asset sales initiated during the Covid-19 pandemic. However, no immediate decision is foreseen this week, as the FOMC is unlikely to alter its communication strategy.

The Fed’s interest rate decision coincides with the Bank of Japan’s first interest rate hike in 17 years, prompting market reactions in Tokyo and impacting currency exchange rates. Similarly, other central banks, including the Bank of England, are poised to announce their interest rate decisions later in the week, contributing to global market dynamics and investor sentiment.