The Federal Reserve announced on Wednesday that it would keep the target range for the federal funds rate unchanged at 5.25%-5.5%, following a 25 basis points hike in July, and in line with market expectations. However, the central bank also hinted that there could be one more increase this year, as the economy continues to recover from the pandemic-induced recession.
The Fed’s decision was based on its assessment of the current and expected economic conditions, as well as its inflation and employment goals. According to the projections released in the dot-plot, the Fed expects the fed funds rate to reach 5.6% by the end of this year, then decline to 5.1% in 2024, implying one more hike this year and two cuts in 2024. The Fed also revised its forecasts for GDP growth, inflation, and unemployment, reflecting the improved outlook for the economy.
The Fed now sees GDP growth at 2.1% this year, up from 1% seen in June, and at 1.5% in 2024, up from 1.1%. The Fed also expects inflation to moderate slightly, with the PCE inflation rate at 3.3% this year, down from 3.2%, and at 2.5% in 2024, unchanged from June. The core PCE inflation rate, which excludes food and energy prices, is projected to be 3.7% this year, down from 3.9%, and 2.6% in 2024, unchanged from June. The Fed also anticipates a lower unemployment rate, with the jobless rate at 3.8% this year, down from 4.1%, and at 4.1% in 2024, down from 4.5%.
The Fed’s decision was largely expected by the market, as the central bank had signaled its intention to taper its asset purchases and raise interest rates gradually in response to the strong economic recovery and rising inflation pressures. However, the Fed also stressed that its policy actions would depend on the evolution of the economy and the risks posed by the coronavirus variants and other factors.
The market reaction to the Fed’s announcement was muted, as investors had already priced in the likelihood of one more hike this year and two cuts in 2024. The US dollar index edged up slightly against a basket of major currencies, while the US Treasury yields remained stable across the curve. The US stock market also showed little change, as the S&P 500 index closed slightly lower on Wednesday.
The Fed’s next meeting is scheduled for November 7-8, when it is expected to provide more details on its plans to reduce its monthly bond purchases and possibly announce a date for starting the tapering process.
Source: Trading Economics