Washington, D.C., – Federal Reserve officials have signaled their intent to cut interest rates by three-quarters of a percentage point this year, leading to new record highs in the US equity markets. Following the unanimous decision by the Federal Open Market Committee to maintain rates unchanged at 5.25 to 5.5 per cent, investors reacted positively on Wednesday.
The central bank also revised its forecast for US economic growth upwards for this year, while acknowledging that inflation may be slightly higher than initially anticipated. This decision paves the way for a potential rate cut as early as summer, as the Federal Reserve shifts its focus from quelling inflation that rose as the US economy rebounded from the Covid-19 pandemic.
Fed Chair Jay Powell expressed confidence in the economy’s performance, projecting a 2.1 per cent growth in the US gross domestic product for the year, up from the previous forecast of 1.4 per cent. However, concerns about inflation persist, with core inflation expected to reach 2.6 per cent this year, slightly exceeding projections.
Despite the positive outlook for economic growth, the Fed remains cautious, with projections indicating a target range of 4.5 to 4.75 per cent for rates by the end of 2024. The market responded favorably, with the S&P 500 closing at a new record high and the Nasdaq Composite also posting gains.
Investors showed confidence in the Fed’s approach, with futures markets indicating an increased likelihood of a rate cut in June. While some economists expressed concerns about rising inflation, the Fed’s conservative stance on interest rates was seen as justified.
The Fed’s decision to maintain the pace of reducing its bond and mortgage-backed security holdings while signaling a potential slowdown in the process was met with a generally positive response. Overall, the meeting conveyed a dovish tone, as officials balanced higher growth and inflation projections with planned rate cuts.
As the Fed continues to monitor economic data and inflation trends, the path ahead remains uncertain. Powell emphasized the importance of data-driven decision-making, underscoring the Fed’s commitment to achieving its inflation target in the long term.