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The Federal Reserve maintained interest rates at the same level, but signaled that one more rise before 2020 concludes is still likely, with fewer cuts projected for the coming year. Furthermore, the Fed also significantly increased its economic growth forecasts for 2019, with the gross domestic product expected to show a 2.1% rise by the end of the year. Alongside these decisions, the central bank is continuing to decrease its bond holdings, thus reducing its balance sheet by an estimated $815 billion from June 2022.
The Federal Reserve announced Wednesday that it is keeping interest rates steady, but still anticipates a single hike before the end of the year and fewer rate cuts than previously expected in 2024. If the Fed follows through with this move, it would bring the policy tightening process that began in March 2022 to a dozen hikes. Markets had fully anticipated no change in the fed funds rate, which currently stands between 5.25%-5.5%, the highest it has been in 22 years. This rate effects the price banks charge each other for overnight lending, as well as many consumer debts.
In response to the announcement, Federal Open Market Committee Chair Jerome Powell noted that the central bank is taking a careful approach to determining the extent of further policy tightening. He added that the Fed would like to see progress on inflation before it definitively concludes the amount of additional policy firming. The Fed's dot plot for 2024 registered the likelihood of one more hike this year and two cuts in 2024, two fewer than was forecast in June. If carried out, this would bring the fed funds rate to roughly 5.1%. The committee also provided the first outlook for 2026, indicating a funds rate of 2.9%, higher than the "neutral" rate of 2.5%. Twelve members expressed support for the additional hike, with seven opposed, one more than at the June meeting. Adriana Kugler, the recently appointed Fed Governor, did not vote.
Members of [organization] revised their economic growth expectations for this year substantially, suggesting it will rise by 2.1%. This is more than double the projection they had made in June and serves to indicate that they do not suspect a recession in the immediate future. Moreover, their prediction for 2024 GDP was upgraded to 1.5%, up from 1.1%.
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The inflation rate as measured by the core personal consumption expenditures price index decreased to 3.7%, which was 0.2 percentage points fewer than June. Moreover, the prediction for unemployment decreased too, at this point being 3.8% instead of 4.1% before. The announcement reflected the shift in the economic predictions, claiming that economic activity was "expanding at a solid pace," while before it was merely described as "moderate." The statement also stated a decrease in job increases for recent months, but still being seen as "strong" instead of "robust" as before. Additionally, the Federal Reserve is not only continuing to keep the rates high, but also has reduced its bond holdings by $815 billion since June 2022, permitting $95 billion in proceeds from maturing bonds to go uncaptured every month.
At this sensitive juncture for the U.S. economy, Federal Reserve officials have seemingly transformed their outlook; moving from the idea that it was preferable to handle inflation with an excess of caution to a more balanced approach. This change is partially attributed to the delayed effects of raising rates, marking the tightest monetary policy from the Fed since the 1980s. Evidently, it is becoming more apparent that the central bank has the ability to ease inflation without the economy entering a recession. In spite of this, Fed insiders remain prudent in making any optimistic predictions. Alexandra Wilson-Elizondo of Goldman Sachs Asset Management commented that they had been expecting a certain degree of severity from Fed chairman Jerome Powell at Jackson Hole, yet the results were more stringent than expected. Thus the Federal Reserve has the option to pause as a share of the prior policies have been put into action. Still, the primary hazard is undermining the greatest advantage of the Fed, its anti-inflationary reliability, which makes it necessary to err on the side of hawkishness.The paper was considered to be of low quality
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The resilient consumption seen along with the increase in energy prices is likely why the median dot will move higher next year, Wilson-Elizondo said. She also noted that there are no distinct bearish catalysts on the horizon; however, the combination of strikes, the shutdown, and the return of student loan repayments until their next decision will cause choppiness in the data. Thus, the next meeting should be interesting, though it may not be a guaranteed outcome.The jobs sector has been stable, with an unemployment rate of 3.8% which is only slightly higher compared to one year ago. In addition, job openings have diminished, helping the Federal Reserve show further progress towards the supply-demand mismatch that once saw two job positions for every job seeker.Moreover, inflation data has improved, but the annual rate is still greater than the targeted 2% by the Federal Reserve. Its preferred index in July indicated a core inflation rate of 4.2%.Furthermore, consumers remain unwavering in their spending habits, despite dwindling savings and a record-breaking $1 trillion credit card debt. Recent surveys conducted by the University of Michigan revealed that one-year and five-year inflation expectations have both hit multiyear lows.Correction: The Federal funds target rate is a range of 5.25-5.5%. A previous version of this story misstated the end point of the range.
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