Rates unchanged amid cooling inflation

The Federal Reserve said Wednesday it was keeping its key interest rate unchanged as it fights elevated inflation rates that have been pinching U.S. businesses and consumers.

In a statement Wednesday, the central bank said economic activity “has continued to expand at a solid pace,” while job gains “have remained strong, and the unemployment rate has remained low.”

Though inflation has eased over the past year, it remains elevated — even as there has been “modest further progress toward the Committee’s 2% inflation objective.”

The Fed now projects just one rate cut in 2024, down from multiple ones in its previous projection.

Indeed, signs of easing price growth have emerged, leaving some economic analysts to speculate that a rate cut could come prior to November’s general election.

The Fed is in charge of keeping inflation under control. It does this by managing the federal funds rate, which influences borrowing costs for everything else in the economy.

For the past year, the Fed has held that rate at approximately 5.5%.

By keeping interest rates elevated, the Fed hopes to reduce consumer demand for goods and services — and in turn slow price growth. When consumers find it easier to make purchases, businesses feel more comfortable raising prices.

The Fed’s policy has resulted in APRs of more than 20% on most major credit cards, according to Bankrate, alongside mortgage and auto loan rates starting at 7%.

Those higher rates may be working: Earlier Wednesday, the Bureau of Labor Statistics reported that 12-month inflation hit 3.3% in May, compared with 3.5% in April and lower than analysts’ expectations.

On a monthly basis, inflation didn’t rise at all, the first time that’s happened since July 2022.

Fed officials have indicated they are in no rush yet to change the current rate level, hoping instead for continued progress on price growth.

“Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CNBC last month in an interview when asked about what it would take for interest rates to come down.

But Joe Brusuelas, chief economist at RSM accounting and consultancy group, said the slowing price-growth trend is likely to continue through the summer and could lead to a rate cut as soon as this fall.

“This should play into the Federal Reserve’s forecast which points to a September rate cut as both the consumer price index and the personal consumer expenditure price index inch back towards the Fed’s long term 2% inflation target,” he said.

The U.S. economy is showing signs of softening elsewhere, too.

In a note to clients, the chief international economist for the ING financial services group, James Knightley, said he believes the Fed could cut soon given softening inflation, rising unemployment — now at 4% — and slowing consumer spending.

“Today’s outcome has boosted the chances of a September start point for rate cuts considerably,” he wrote, referring to the Wednesday inflation report.

The Fed rate holds are coming at a time when it is facing some external pressure to cut. This week, three U.S. senators led by Elizabeth Warren, D-Mass., called on the Fed to lower rates because they are driving up housing and insurance costs.

Meanwhile, Canada and the European Union also recently announced their own rate cuts.

As an independent central bank, the Fed is unlikely to be influenced directly by such outside pressures.

Instead, Fed officials have uniformly asserted that their decisions are dependent on data.

Now, that data is increasingly showing an economy that is no longer overheating.

“Fed officials … will clearly welcome this slowing in inflation,” economic analysts with Citi Research wrote Wednesday. “We continue to expect the first rate cut in September and consecutive 25 (basis-point) cuts thereafter.”

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