FED keeps the highest interest rate in 23 years, expects 3 cuts in 2024, stocks immediately break records: Only thing changed in the statement

On March 20, the US Federal Reserve (FED) kept interest rates unchanged as expected and signaled that it still plans to cut interest rates many times this year.

Keep interest rates unchanged

After a two-day policy meeting, the Federal Open Market Committee (FOMC) decided to leave interest rates unchanged. Currently, the FED's reference interest rate is maintained at 5.25% - 5.5% as in the interest rate increase in July 2023 - the highest level in more than 20 years.

Along with this decision, FED officials also maintained their plan to implement three cuts of 0.25 percentage points this year. Once the FED makes this move, this will be the first cut since the early days of the Covid-19 pandemic outbreak in 2020.

FED's target interest rate. Source: CNBC

The prediction of these three cuts comes from the FED's dot-plot chart. The chart is a series of dots representing the views of 19 FOMC officials on interest rates this year and in the future. The chart shows no indication of the timing of a rate cut.

Last updated in December last year, the dot-plot chart predicted 4 interest rate cuts in 2024, 1 more than the current prediction. The committee expects three more reductions in 2026 and then two more in the future until the federal funds rate stabilizes at about 2.6%. This number is close to the neutral level estimated by policymakers.

The FED's target interest rate increases from 2022. Source: CNBC/New York FED

FED Chairman Jerome Powell said the central bank itself has not determined the timing, but he predicts interest rate cuts will still take place, as long as the data is consistent with the FED's view.

At a press conference after the meeting, Mr. Powell said: “We believe our policy interest rate may peak this cycle, and if the economy grows as expected, it will be appropriate to begin tightening policy.” book at some point this year is probably appropriate.” He added that the Fed is prepared to maintain current interest rates longer if needed.

Raise GDP forecast

Besides the dot-plot, officials also provided estimates for GDP, inflation and unemployment in the Fed's Summary of Economic Projections. Specifically, officials raised their GDP growth forecast this year. The US economy will grow 2.1%, up from an estimate of 1.4% in December.

The unemployment rate is forecast to decrease slightly compared to previous estimates. The unemployment rate recorded in February was 3.9%. Meanwhile, the core inflation forecast measured by personal consumption expenditures (PCE) increased to 2.6%, 0.2 percentage points higher than before but slightly lower than level 2, The most recent 8%.

The statement after the FOMC's meeting is almost identical to the statement made at the most recent meeting in January. The only change in the FED's new statement is that the phrase "moderate" employment is replaced by the word maintained “strongly”.

FED keeps the highest interest rate unchanged in 23 years, expects 3 cuts in 2024, stocks immediately break records: Only thing changed in the statement - Photo 4.

Fed Chairman Jerome Powell

During the press conference, Fed Chairman Jerome Powell noted that the strong jobs market will not prevent the central bank from cutting interest rates.

“Strong hiring by itself would not be a reason to delay a rate cut,” he said. The job market itself is not a cause for concern about inflation. Previously, Powell had said that “unexpected weakness in the labor market could also lead to a policy response.”

Mr. Powell also noted that rising inflation data cannot change the overall downward trend. In fact, inflation is still gradually decreasing. Although sometimes bumpy, the path is still moving towards the 2% target. He said the Fed will not overreact to hot data in January and February, but will not ignore them either.

After the decision to maintain the expected plan of implementing 3 interest rate cuts, the S&P 500 index increased beyond 5,200 points, setting a new record. Before the meeting, some investors were concerned that recent hot inflation reports could mean fewer cuts, or even fewer, than the market expected. Financial stocks rose after the FED's decision, with hopes that interest rate cuts this year will help the economy grow.

According to CNBC

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