The US Federal Reserve kept the rate, but indicated the possibility of an increase

Following the results of the June meeting, the US Federal Reserve System (FRS) refrained from raising the rate for the first time since March 2022, leaving it at the level of 5–5.25%. The forecast of the members of the Federal Open Market Committee at the same time provides for an increase in the rate this year to the level of 5.5-5.75%. In its updated macro outlook, the Fed raised both its estimate of US GDP growth and core inflation expectations. According to the head of the Fed, Jerome Powell, the regulator will continue the practice of making decisions “from meeting to meeting” – the markets are waiting for a rate hike in July.

The Open Market Committee of the US Federal Reserve on Wednesday refrained from raising the key rate, leaving it at the level of 5-5.25%. Recall that in May the regulator raised the rate by 0.25 percentage points, but abandoned the previous indication of the need for its further increase.

Keeping the rate at the current level will allow the Fed to take into account additional data and their impact on monetary policy, the statement said.

In assessing the state of the US economy, the regulator noted that business activity is expanding at a “moderate pace”, unemployment remains low, and inflation is at an elevated level. The Fed kept the wording in its statement that the tightening of credit conditions will affect households and companies, lead to a decrease in economic activity, employment and inflation, but to an “undefined” extent. Next, the Fed will take into account the cumulative effect of increases and the lag with which they affect the economy.

Fed Chairman Jerome Powell said following the meeting that most committee members expect a rate hike before the end of this year. He also noted the shortage of personnel in the labor market and the need to separate the level of the rate and the speed of its increase. The regulator needs time, among other things, to assess the consequences of the banking crisis for the financial sector, Mr. Powell noted.

It should be noted that the scatter chart with the forecasts of the committee members, published after the meeting, assumes an increase in the key rate this year to the level of 5.5-5.75% and a reversal of the Fed’s policy only in 2024.

After the publication of the results of the meeting, market participants changed their expectations and now they are also waiting for a rate increase already at the July meeting.

Pressure on the Fed is reduced as inflation slows down – in May, the US consumer price index (CPI) fell to 4% in annual terms from 4.9% in April. The value of the indicator became the minimum for two years (month-on-month growth slowed down from 0.4% to 0.1%). However, core inflation slowed down only from 5.5% to 5.3% yoy, while its monthly growth rate remained at the level of 0.4%, in particular, the growth in prices for rental and transport services accelerated. At the same time, energy costs fell by 11.7% (minus 3.6% for the month), food costs increased by 6.7% (against April – plus 0.2%).

The Fed’s updated forecast calls for a decline in headline inflation in the US this year to 3.2%, with the economy growing by 1%, and not by 0.4% of GDP, as expected in March – in this part of the forecast was significantly improved. In the first quarter, the US economy grew by 1.3% in annual terms. The core inflation forecast, however, was upgraded from 3.6% to 3.9% (with a slowdown to 2.6% next year). At the same time, the US unemployment rate rose to 3.7% in May against 3.3% in April, despite the emergence of 399,000 new jobs (this figure was higher than in March and April of this year). However, the Fed cut its unemployment forecast for this year from 4.5% to 4.1%.

Natalya Milchakova, a leading analyst at Freedom Finance Global, notes that the Fed is likely to build on inflation data in June – if price growth does not show further progress in its slowdown, then the regulator may again raise interest rates by 0.25 percentage points in July.

Tatyana Edovina