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The Federal Reserve is likely to keep interest rates steady in its next decision on Wednesday.
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It follows a strong jobs report and still high inflation.
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Given recent economic data, it will likely take longer for the Fed to cut rates.
Americans shouldn’t expect rate cuts to come their way anytime soon.
The Federal Open Market Committee will announce its next interest rate decision on Wednesday, and after a positive jobs report, there is a good chance that rates will remain stable again. According to the CME FedWatch Tool, which estimates the likelihood that the Federal Reserve will change interest rates based on market forecasts, there is a 99.4% chance that interest rates will remain at current levels starting Monday.
While the FOMC forecast three rate cuts this year in its December projections, Fed Chairman Jerome Powell has reiterated throughout the year that nothing is set in stone, and that the nation’s central bank is willing to hold on for as long as necessary until it is confident that the economy has cooled down sufficiently.
“The first quarter in the United States was notable for the lack of further progress on inflation,” Powell said during a panel in Amsterdam in May.
“We didn’t expect this to be a smooth road, but these were higher than I think anyone expected,” Powell added. “What that has told us is that we need to be patient and let the restrictive policies do their work.”
The consumer price index rose 3.4% in the 12 months ending in April, meaning it is still high. The next CPI report will be published on Wednesday morning. And the US labor market showed some strength in May; the US economy created 272,000 jobs that month, far exceeding economists’ expectations.
“We have a very interesting labor market,” Julia Pollak, chief economist at ZipRecruiter, told Business Insider. “It’s not the old normal. It’s the new normal in which employers fire slower, hire slower and employees change jobs more slowly. That can be both a good and a bad thing.
“Part of it could be bad because part of it is driven by uncertainty and fear and by high interest rates that are holding back activity,” Pollak added. “But it’s good in other ways too, because some of it has to do with the fact that jobs have gotten better during the pandemic.”
The unemployment rate also rose to 4.0% in May; the last time this rate was like this was in January 2022. Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, said May’s rate was “still quite low historically.”
Still, Joseph Briggs, an economist at Goldman Sachs, told BI that while rate cuts have “slowed somewhat due to more persistent inflation in the first quarter, we think we’re still on track to two this year as of September.”
Powell previously outlined what it would take to cut rates. At the May press conference following the FOMC’s decision to hold rates steady, Powell said there are two routes that would give the Fed enough confidence to cut rates: more data showing inflation closer to 2% target of the Fed, or whether there is an ‘unexpected weakening of interest rates’. the labor market.”
“If we had a path where inflation turns out to be more persistent than expected, and where the labor market remains strong but inflation moves sideways, and we don’t gain more confidence, that would be a case where it might be appropriate to hold off on rate cuts,” Powell said.
David Kelly, the chief global strategist at JP Morgan Asset Management, also told BI last week that there could be two rate cuts this year.
“I think there will be enough softness and coolness in the economy to start cutting rates this year,” Kelly said. “And if I had to bet, I bet we’ll get two rate cuts, one in September and one in December.”
Some Democratic lawmakers have pushed the Fed to cut rates and give Americans some breathing room, especially after the European Central Bank cut rates for the first time in five years earlier in June. In a letter to Powell on Monday, Elizabeth Warren, Jacky Rosen and John Hickenlooper pointed to the ECB’s actions as a sign that it was time for the US central bank to follow suit.
“The Fed’s decision to keep rates high continues to widen the interest rate gap between Europe and the US, as lower rates could push the dollar higher, tightening financial conditions,” they wrote, adding: “ You have kept interest rates too high. too long: it’s time to cut interest rates.”
Read the original article on Business Insider
