NEW DELHI: The US Federal Reserve decided to maintain the key interest rate unchanged at 5.25 to 5.50 per cent during its latest monetary policy meeting, marking the seventh consecutive time on the trot and penciled in just one rate cut this year, down from the three expected in March.
The interest rates were near zero during the COVID-19 pandemic.
Increasing interest rates is a monetary policy tool that helps suppress demand in the economy, thereby helping in reducing inflation.
US Fed Chair Jerome Powell welcomed the inflation data but said that the inflation data so far this year has not provided them with greater confidence in achieving their goals.
Powell said, “We are maintaining our restrictive stance of monetary policy in order to keep demand in line with supply and reduce inflationary pressures. I will have more to say about monetary policy after briefly reviewing economic developments.”
Although consumer price inflation in the US has been declining, it still remains above the central bank’s target of 2 per cent. The inflation rate increased by 3.3 per cent year-on-year in the 12 months leading up to May, raising expectations of early interest rate cuts.
In its monetary policy statement the US Fed said, “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.”
The central bank also stated that in considering any adjustments to the rate, it said it will carefully assess incoming data, the evolving outlook, and the balance of risks.
“The central bank seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,” it said.
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” it added.
The US Fed officials currently anticipate only one rate cut this year, followed by four cuts in the next year and four in 2026. This time, in its monetary policy statement, it “modest further progress toward the 2 per cent inflation objective”, against its previous statement that had said “lack” of further progress. So, there has been a change in language.
Following the rate decision and inflation data, the S&P 500 hit new highs, surpassing 5,400 points. Analysts predict that stocks will continue to rally regardless of policy decisions.
The US Fed also put out its Economic Projections, and monetary policy participants generally expect GDP growth to slow from last year’s pace, with a median projection of 2.1 percent this year and 2.0 percent over the next two years.
Investors across Asia reacted positively to the developments from the US capital. Stock exchanges in Hong Kong, Sydney, Seoul, Singapore, Wellington, Taipei, Manila, and Jakarta all experienced gains. However, the markets in Tokyo and Shanghai slightly dipped.
(With inputs from agencies)
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