The American Federal Reserve (Fed) on Wednesday kept its rates unchanged, which remain at the highest level in more than twenty years, but it maintains the plan to reduce the cost of credit three times this year.
Overnight rates remain between 5.25% and 5.50%, the central bank announced in a press release, after a unanimous decision by members of the Monetary Committee (FOMC).
Fed members, who significantly raised their projection for U.S. GDP (gross domestic product) growth to 2.1% this year, instead of 1.4% previously, still expect three rate cuts. a quarter of a percentage point in 2024, an election year.
For 2025, however, the Committee is less optimistic, forecasting only three other rate cuts to bring them down to 3.9%, instead of four previously projected.
The markets expected this status quo on rates but were more uncertain about the prospects of cuts this year by the Fed.
Wall Street, in a timid decline in the first part of the session, turned green when traders were reassured by plans to reduce rates intended to support the economy once inflation is brought under control.
The three New York indices climbed to records, the Dow Jones gained 1.03%, the Nasdaq +1.25% and the S&P 500 +0.89%. As for the dollar, it fell sharply against the main currencies given the confirmed prospect of lower rates which will make it less profitable.
Jerome Powell, Chairman of the Fed, estimated during a press conference that inflation remained “still high” (at 3.2% according to the CPI index), but he reiterated that he was convinced that it would reach “over time” to the 2% objective, even if “the road may be bumpy”.
“We are firmly committed to reducing inflation to 2% over time. This is our goal and we will achieve this goal. The markets believe that we will succeed and we must believe it,” he insisted.
A “solid” economy
In its press release, almost identical to that of the previous meeting in January, the Federal Reserve considers the American economy “solid”, with “strong employment gains”, while the unemployment rate remains at 3.9%. . Strong growth in the job market is not in itself “a reason for concern about inflation”, assured Mr. Powell, indicating that wage growth had calmed.
In its new economic forecasts, the Fed anticipates, as it did three months ago in its latest projections, inflation at 2.4% in 2024, which will struggle to fall below its current level, according to the PCE index.
The unemployment rate will increase less than she feared, to 4% this year and 4.1% next year.
The Committee reiterates “do not expect it to be appropriate to lower the rate target until we are more confident in the sustainable path of inflation towards the 2% target”.
To curb high inflation born from massive monetary support provided after the global health and economic crisis caused by the COVID-19 pandemic, the American central bank raised its rates by 5 points from March 2022 to July 2023, an unprecedented rate, carrying up to 5.25%-5.50%.
The Fed has thus managed to reduce inflation by two thirds since its peak at 9.1% in June 2022, without causing a recession so far, hoping to conclude with a “soft landing” by taming inflation without creating too much unemployment.
In January, it had fallen over one year, to 2.4% against 2.6%, according to the PCE index, the Fed’s favorite measure, but had accelerated over one month, to 0.3% against 0.1%. .
Jerome Powell also indicated that the Fed would “very soon” slow down the reduction in the volume of its assets on its balance sheet until it kept only Treasury bills in these reserves and no longer also mortgage securities.