The U.S. Federal Reserve opted for a jumbo cut on Wednesday, deciding to cut the federal funds rate by 50 basis points – up from the 25 basis points that analysts had seen as the most likely bet. However, the chairman Jerome Powell warns that this will not become a habit and that, if there are future cuts, they will not have to be of the same size.
“Nobody should look at this and say, ‘This is the new rhythm.’ At the baseline, we see cuts over time to a more neutral level and we are moving at the pace we consider appropriatetaking into account the evolution of the economy”, Powell stressed during the press conference, after the Federal Open Market Committee (FOMC) meeting.
In their economic projections, officials have slightly revised downward their forecast for gross domestic product (GDP) growth this year, to 2% from 2.1%, with the pace expected to remain the same in subsequent years. However, they are more optimistic about inflation, having revised downward their projections and anticipating that the personal consumption expenditures (PCE) price index will be 2.3% in 2024, compared to the 2.6% forecast in June.
Powell maintained that all decisions on whether to cut interest rates “will be made on a meeting-by-meeting basis,” a strategy that has been followed over the past year. The Fed chairman argued that the central bank “has been very patient with regard to cutting the federal funds rate,” while other central banks have opted to have already moved forward with monetary policy easing. And this “patience has borne fruit” in terms of “confidence” about the downward trend in inflation..
“Inflation is now very close to our target (of 2%). We have gained greater confidence that inflation is falling sustainably towards 2%,” Powell said, echoing a message he has delivered on several occasions, including at the ECB Forum in Sintra.
However, Powell recalled that the Fed has a dual mandate of ensuring price stability and full employment and that, therefore, this cut is aimed at “maintaining the strength of the economy and the labor market”. “Inflationary risks have diminished, while employment-related risks have increased,” he warned. This year, the unemployment rate should be around 4.4%according to new projections, which compare with the 4% predicted in June, and then fall again in the following years.
Despite this cut and those that are foreseen for the Fed’s future, the central bank leader rejected the idea that this is a prediction of the end of the Fed’s balance sheet reduction. “We are not thinking of stopping the run off (of the balance sheet). The two things can coexistin the sense that both are a form of normalization (of monetary policy) and, therefore, for some time, the balance sheet may be reduced and interest rates cut”.
(News updated at 8:51 pm).
Source: www.jornaldenegocios.pt
