The Fed is likely to scale back its interest rate cuts plans due to persistent inflation

WASHINGTON (AFP) – Federal Reserve officials on Wednesday are likely to formally announce what has been clear for several weeks: with inflation remaining at… 2% higher than their targetThey are lowering their expectations for interest rate cuts.

In a set of quarterly economic forecasts they will release after their last meeting, policymakers are expected to forecast that they will cut the benchmark interest rate twice by the end of the year, instead of three times they had envisaged. in March.

The Fed’s updated economic forecasts, which it will release Wednesday afternoon, are likely to be influenced by government expectations Inflation data for May, released Wednesday morning. This report showed that inflation slowed unexpectedly. Overall prices were unchanged from April to May. Core prices, which exclude volatile food and energy costs, rose just 0.2%, the smallest monthly rise since October.

Compared to the previous year, consumer prices rose 3.3% in May, down from 3.4% the previous month. Core inflation slowed year-on-year from 3.6% in April to 3.4% in May, the lowest annual pace in three years.

The Fed’s interest rate policies typically have a significant impact on the costs of mortgages, auto loans, credit card rates, and other forms of consumer and business borrowing. Lowering their expectations for interest rate cuts means these borrowing costs are likely to remain high for longer, which is a disappointment to potential homebuyers and others.

However, the Fed’s quarterly forecasts for future interest rate cuts are by no means fixed in time. Policymakers often revise their plans to lower — or raise — interest rates depending on how economic growth and inflation measures evolve over time.

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But if borrowing costs remain high in the coming months, it could also have consequences for the presidential race. Although the unemployment rate fell to 4%, employment rates are strong and consumers continue to spend, voters generally took a stand A sour view of the economy Under President Joe Biden. This is largely because prices are still much higher than before the pandemic. High borrowing rates impose an additional financial burden.

The inflation rate declined steadily in the second half of last year, which raised hopes that the Fed would be able to achieve a “soft landing,” whereby it could beat inflation by raising interest rates without causing a recession. Such an outcome is difficult and rare.

But inflation was unexpectedly high in the first period Three months this yeardelaying hoped-for rate cuts from the Fed and potentially jeopardizing a soft landing.

In early May, Chairman Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would cut its benchmark interest rate. Powell noted that gaining that confidence will likely take longer than Fed officials previously thought.

Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “several more months of good inflation data” before he would consider supporting interest rate cuts. Although Waller did not clarify what would constitute good data, economists believe core inflation should be 0.2% or less each month.

Powell and other Fed policymakers also said that as long as the economy remains healthy, they see no need to cut interest rates soon.

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“Fed officials have clearly indicated they are in a wait-and-see mode regarding the timing and size of interest rate cuts,” Matthew Luzetti, chief U.S. economist at Deutsche Bank, said in a note to clients.

The Fed’s approach to interest rate policies depends largely on the recent shift in economic data. In the past, the central bank would have placed more weight on its perception of inflation and economic growth in the coming months.

However, they now “don’t have any confidence in their ability to forecast inflation,” said Nathan Sheets, Citi’s global chief economist and former chief economist at the Federal Reserve.

“Nobody has been successful in forecasting inflation” over the past three or four years, Sheets said.

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