2024-01-31 21:43:43
Central banks are not willing to undo the efforts of the last two years. Although inflation has moderated, the 2% objective continues to resist them. For this reason, the Federal Reserve Open Market Committee (FOMC) withstood the pressure and decided to keep rates unchanged in the 5.25%-5.5% range, a 23-year high. With this, there are now four times that the US central bank has not touched rates, a situation that has not been seen since the beginning of 2022. At that time the situation was very different. Prices were sending alarm signals, but the Fed was reluctant to end the era of cheap money. Now officials are reluctant to take their foot off the accelerator.
The committee believes that the risks to achieving its employment and inflation objectives are balancing out. “The economic outlook is uncertain and we must be attentive to the risks of inflation,” the institution reiterated in the statement. Although officials believe it is not appropriate to loosen the rope, for the first time in two years they have abandoned the rhetoric that a rate increase was possible. Instead, they have opted for a more impartial stance. In case there was any doubt, the committee stressed that they do not expect to make rate cuts until the 2% objective is reached.
The Fed is struggling to achieve something it has only achieved once in its more than 100-year history: lowering inflation without triggering a recession. That is, the so-called soft landing, an increasingly probable scenario. The best proof of this is that the US economy grew 0.8% in the fourth quarter, while inflation closed at 3.4%, compared to 7% in 2021 and 6.7% in 2022. A task is not an easy one in a year marked by the presidential elections and the political division that the country is experiencing. According to information collected by Bloomberg, several Democratic Party lawmakers have written to Fed Chairman Jerome Powell to lower rates.
Along with the price of money, the central bank reiterated its intention to continue reducing the balance sheet at a rate of 95 billion dollars per month. The resilience shown by the US economy and labor market, whose unemployment rate remains below 4%, create the right conditions for the Fed to maintain a restrictive monetary policy.
In his appearance before the press, the Fed president was somewhat more moderate. Although he believes they are prepared to keep rates high as long as necessary, he believes rates have peaked. “Lower inflation is welcome, but more evidence is needed,” he stressed. Powell does not see economic robustness as a problem and although it has been six months in which the disinflationary process has run its course, he believes that more progress is necessary. Geopolitical tensions are seen as a threat and although energy prices have withstood the course of events in the Red Sea, officials still have in mind the havoc caused by supply chains in the pandemic.
As ECB President Christine Lagarde did a week earlier, Powell stated that in the first meeting of 2024 they had not discussed the proposal to lower rates. With these words, the head of the Fed tries to dispel expectations of a cut in March. However, he conceded that unexpected weakness could speed up the process. In recent weeks, statements by Fed members urging caution have helped lower expectations for monetary easing. After this month’s appointment, the probabilities of a reduction in March fall to 59%. With more than 100%, June continues to be the option that is gaining the most strength.
The resistance shown by the Fed translated into new falls for the Stock Market. The Dow Jones index lost 0.83%, the Nasdaq technology index 2.23% and the S&P 500 1.61% at the closing bell.
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