Federal Reserve Chair Jerome Powell addressed recent inflation concerns on Wednesday, emphasizing that despite elevated readings, the fundamental narrative of gradually alleviating price pressures remains unchanged in the U.S. The central bank maintained its course for three anticipated interest rate cuts this year, affirming expectations for sustained economic growth.
In its latest update, the Fed chose to keep interest rates steady and unveiled revised quarterly economic projections, forecasting a robust 2.1% expansion for the U.S. economy in the current year. This outlook surpasses previous estimates and reflects a significant uptick from the 1.4% growth projected in December.
Simultaneously, projections indicate a marginal rise in the unemployment rate to 4% by the end of 2024, a negligible shift from the present 3.9% level. Additionally, a key inflation metric is expected to continue its descent, albeit at a moderated pace, with forecasts suggesting a year-end rate of 2.6%.
Despite the backdrop of declining interest rates, the Fed remains optimistic about achieving a “soft landing” from the post-pandemic inflation surge, echoing Powell’s cautious optimism amid recent data fluctuations. Following the policy meeting, where the benchmark overnight interest rate remained at 5.25%-5.50%, Powell reiterated that the timing of rate adjustments hinges on growing confidence in inflation’s gradual descent towards the Fed’s 2% target, alongside the resilient performance of the economy surpassing expectations.
In a press conference, Federal Reserve Chair Jerome Powell acknowledged that recent inflation reports indicated persistent “elevated” price pressures, although he emphasized that they hadn’t altered the broader narrative of inflation gradually declining toward the Fed’s 2% target. Powell stressed the importance of upcoming inflation data in confirming the sustained easing of price pressures, suggesting that if inflation doesn’t continue to ease, the Fed would maintain high interest rates for as long as necessary.
Responding to inquiries about previous remarks suggesting the Fed was nearing confidence in rate cuts, Powell refrained from reiterating those sentiments, instead emphasizing the necessity for more data before any policy shifts. Powell reiterated the Fed’s cautious approach to rate cuts, citing the ongoing strength of the economy and job market as reasons to proceed slowly with monetary policy adjustments.
While reaffirming the expectation for three rate cuts this year and upgrading the economic outlook, Fed officials slightly reduced the anticipated number of cuts for the following year, signaling a more gradual pace of easing. Analysts interpreted this stance as “bullish-dovish,” suggesting an endorsement of the broader economic strength, including improved productivity and labor market outlooks.
Despite recent inflation disappointments, the Fed maintains its view of improving underlying inflation dynamics, with projections indicating upward revisions to productivity growth and labor force forecasts. Market reactions to the Fed’s announcements were positive, with U.S. stocks extending gains, the dollar slipping against major currencies, and U.S. Treasury yields falling, while investors increased bets on an imminent rate cut.
The updated economic projections revealed expectations for the personal consumption expenditures price index excluding food and energy to rise by 2.6% by year-end, compared to 2.4% projected in December. Notably, despite stronger-than-expected inflation, a majority of Fed officials still anticipate at least three rate cuts by the end of the year, albeit a slightly hawkish shift from previous projections.
Additionally, the longer-run policy rate was adjusted upward by a tenth of a percentage point, reflecting some officials’ belief that the economy could sustain higher interest rates in the future. Looking ahead, median projections suggest a slower pace of rate cuts in 2025 and 2026 compared to previous estimates, indicating a more gradual approach to monetary policy adjustments.
The unanimously approved Fed statement highlighted solid economic expansion, strong job gains, and a low unemployment rate as key factors shaping current policy considerations.