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E-mail Xinhua, February 1, 2024
by Matthew Rusling, Xiong Maoling
WASHINGTON, Feb. 1 (Xinhua) -- The U.S. Federal Reserve (Fed) on Wednesday held interest rates steady and put off a widely expected rate cut in the nearest future.
"Inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain," said Fed Chair Jerome Powell at a press conference Wednesday after the two-day central bank meeting, the first in 2024.
He avoided signaling an imminent rate cut in March, the time of the next Fed meeting, given that inflation is not where the central bank wants it to be.
"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," according to a statement released by the Federal Open Market Committee (FOMC), the Fed's policy-setting body, on Wednesday.
TOO SOON OR TOO LATE?
Some economists believe Wednesday's move was the correct one.
Desmond Lachman, a senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund (IMF), told Xinhua: "The Fed did the right thing today."
"However, it probably made a mistake by intimating that rate cuts would not begin till the middle of the year," Lachman said.
But some economists favor rate cuts sooner rather than later.
"I wish they had lowered (rates)," Dean Baker, a senior economist at the Center for Economic and Policy Research, told Xinhua.
"This is unnecessarily restrictive policy," Baker said.
At the press conference, Powell noted that inflation remains above the Fed's longer-run goal of 2 percent.
Total personal consumption expenditures prices rose 2.6 percent over the 12 months ending in December; excluding the volatile food and energy categories, core PCE prices rose 2.9 percent.
When asked whether he felt comfortable saying the economy has reached a soft landing, the Fed chair gave a firm "no."
"I would not say we reached the 12-month target on core inflation. We are certainly encouraged by the progress, but we are not declaring victory at all at this point. We think we have a way to go," Powell said.
The central bank chief said reducing policy restraint "too soon or too much" could result in a reversal of the progress on inflation and ultimately require even tighter policy to get inflation back to 2 percent.
At the same time, reducing policy restraint "too late or too little" could unduly weaken economic activity and employment, he added.
TIMELINE FOR CUTTING RATES
While markets want to see rates slashed, the Fed doesn't want to commit to loosening monetary policy at its next meeting in March.
"I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do (interest rate cuts)," Powell said Wednesday.
A March cut is "not the most likely" or a "base case" scenario, Powell said.
"But that's to be seen," he added.
As of Wednesday night, the Chicago Mercantile Exchange Group's FedWatch Tool showed the probability of a rate cut at the Fed's next policy meeting in March was 53 percent.
Some economists believe the Fed should proceed carefully.
Brookings Institution Senior Fellow Barry Bosworth told Xinhua that while inflation has slowed substantially, "they will want to watch for a few months to ensure stability."
"Fiscal policy remains too stimulative with risks that the budget deficit will rise even further," Bosworth said.
"I see no compelling reason to loosen monetary policy at this time," Bosworth said.
INFLATION STILL HURTS
The United States is seeing the worst inflation in 40 years when it comes to groceries, in large part due to profligate government spending amid the COVID-19 pandemic, when the Fed held interest rates at near zero for a long period of time.
Since March 2022, the Fed has hiked interest rates 11 times in a bid to battle inflation and tamp it back down to its 2 percent goal, lifting federal funds target rate to a range of 5.25 to 5.5 percent.
The rapid rise in inflation has negatively impacted the rural and urban poor the most, as well as those on fixed incomes.
Groceries have been more difficult to afford for many families, and many Americans have had to make cutbacks in their budgets.
Sue Granite, a retiree in the U.S. state of New Jersey, told Xinhua she has seen that people in her local supermarket had to put items back on the shelf, as they could not afford the entire grocery bill.
She said this is very "disturbing," as she has never witnessed this before in a decade of living in the area.
Being on a fixed income herself, she has at times had to rely on family to help her pay her daily expenses, even though she considers herself middle class.
She added that she was "lucky" to have help, as she'd otherwise have to make cutbacks.
Lachman told Xinhua that it seems that the "disconnect" between how surprisingly well that the economy is doing and how people are feeling has to do with inflation.
"Although the rate of inflation has come down sharply without people losing their jobs, the level of prices is higher today than it was three years ago, which causes people's dissatisfaction with the high cost of living," Lachman said.
"We have to understand that people saw a very rapid increase in prices that they're not used to and that went up faster than their wages, so their purchasing power took a hit," Daniel Leigh, who heads the World Economic Studies division in the IMF's Research Department, told Xinhua. Enditem
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