The US Federal Reserve pencils in one interest rate cut this year

  • author, Charlotte Edwards
  • Role, BBC Business Correspondent

The US Federal Reserve has indicated that it will cut its key interest rate only once this year despite the decline in inflation.

Back in March, the central bank was expected to cut borrowing costs three times by the end of 2024.

However, on Wednesday, new forecasts from the Federal Reserve officials who make decisions on interest rates point to one cut.

The new forecasts emerged after the Federal Reserve voted to keep interest rates at their current 23-year highs even as inflation declines.

Inflation, which measures the pace of price rises, slowed to 3.3% in the year to May. This compares to 3.4% in the 12 months to April.

However, inflation was unchanged between April and May, and remains above the Fed’s 2% target.

Federal Reserve Chairman Jerome Powell said only “modest” progress had been made toward achieving the goal, and the central bank would need to see “good inflation readings” before interest rates could be cut.

US interest rates were kept at 5.25%-5.5%.

“We’ve got some good news in terms of improving inflation numbers,” Anastasia Fedek, associate professor of finance at Haas Business School at the University of California Berkeley, told the BBC’s Today programme.

“But the Fed is still very dovish, so it is signaling that in the future they will do one, most likely, rate cut and not a very big one at that time.”

Ian Shepherdson, chief economist at macroeconomics firm Pantheon, said cutting expectations for interest rate cuts from three to one this year was “unnecessarily aggressive.”

While economists at Wells Fargo said it would be “close” between making one or two cuts in 2024.

Officials at the US Federal Reserve are divided on how many interest rate cuts they expect this year. Of the 19 policymakers who provided their forecasts, four expected no cuts, seven expected one cut and eight thought there would be two cuts.

The US Federal Reserve forecast indicated a modest single cut to 5%-5.25%.

Powell admitted that reducing this volume would not have a significant impact on the American economy.

But he said that when the cut finally comes, it will be an “important decision for the economy” and “we want to get it right.”

Although inflation has declined slightly, the labor market in the United States remains strong. The latest data showed that US employers added 272,000 jobs in May – much higher than the expected 185,000 jobs.

“The Fed is trying to react to the data but not overreact to the data,” Ms. Fedek said.

Some other major economies cut interest rates, including the European Central Bank and the Bank of Canada.

But the United States — and the United Kingdom — have yet to take a similar step. The Bank of England is scheduled to meet next week and is widely expected to keep interest rates at 5.25%, their highest level in 16 years.

However, some elements of inflation remain stubbornly high. Meanwhile, average wage growth in the UK remains strong relative to inflation.

Earlier this week, Ruth Gregory, deputy chief UK economist at Capital Economics, said: “Overall, flat wage growth may not prevent the Bank from cutting interest rates for the first time in August, as we expect, as long as other indicators such as… Wage settlements and the CPI release next week show decent progress.”

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