The American Federal Reserve (Fed) kept its interest rates unchanged on Wednesday May 1 following its last meeting, reporting the recent “lack of progress” on the inflation front. However, it announced that it will deflate the volume of assets on its balance sheet more slowly from June.
The American central bank has left its rates at the highest in more than twenty years, between 5.25% and 5.5%, a range within which they have been moving since July, it announced in a press release. This has the effect of keeping interest rates on home loans, credit cards, car loans, etc. high, in order to prevent prices from continuing to soar.
The Monetary Policy Committee states that “in recent months there has been a lack of further progress towards the committee’s target of 2% inflation.” Inflation seemed on track to gradually reach its 2% target. But since January, it has started to rise again, to 2.7% over one year in March, according to the PCE index, favored by the Fed and which it wishes to reduce to 2%, and to 3.5% according to the Consumer Price Index (CPI).
During a press conference following a monetary meeting where the Fed decided to leave rates as they are, Fed Chairman Jerome Powell warned that it would probably take “more time than expected” before having confidence that inflation will fall, implying that rates will remain high for longer. Mr. Powell noted, however, that the next move on rates was “unlikely to be a hike,” with monetary policy considered “sufficiently restrictive” over time.
Markets, which were full of hope that rates would start to fall in June, are now betting instead on September, or even November, according to the CME Group estimate. “The Fed will need several months of good news on wage growth and inflation,” notes Nancy Vanden Houten, economist for Oxford Economics.
Easing of monetary policy
The Federal Reserve, however, marks the beginning of easing monetary policy: it announced on Wednesday that it will reduce the volume of assets on its balance sheet more slowly, starting in June. The American job market also remains too tight for the Fed’s liking. Official figures for April will be released Friday, May 3, but businesses in the private sector alone created 192,000 jobs in April, according to the monthly ADP/Stanford Lab survey released Wednesday.
Finally, the employment cost index was much higher than expected in the first quarter, “suggesting that the deceleration of wages has stopped, at least temporarily”, notes Krishna Guha, economist for Evercore, investment advisory company.
Although the Fed is independent of political power, the evolution of interest rates and prices in the United States is a particularly sensitive subject in this election year, while the outgoing president, Joe Biden, has tried in a first time to focus his campaign on the success of his economic policy. The November vote will be held the day before a meeting of the monetary policy committee.
