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The Federal Reserve announced on Wednesday that it has decided to hold interest rates steady, despite acknowledging 'modest further progress' towards its 2% inflation target. This decision marks a shift from the Fed's previous projections in March, which anticipated three quarter-percentage-point rate cuts for the year.
In its updated policy statement, the Fed also revised its estimate of the long-run, or 'neutral,' rate of interest from 2.6% to 2.8%, indicating that policymakers believe the economy requires more restraint to combat rising prices. This adjustment suggests that the Fed is prepared to keep interest rates elevated for a longer period to bring inflation under control.
The Fed's decision follows a period of steady growth and job creation, with the economy projected to expand at a slightly above-trend 2.1% this year. However, inflation has remained stubbornly high, with recent progress being slow. The Fed's new projections indicate that the inflation rate is now expected to end the year at 2.6%, slightly higher than the 2.4% anticipated in March.
The Fed's policy shift has been met with mixed reactions from investors. While the decision to hold rates steady was largely expected, the downgrade in the outlook for rate cuts has raised concerns about the Fed's commitment to fighting inflation. The Fed's projections suggest that interest rates are likely to remain elevated for an extended period, which could slow economic growth and impact financial markets.
The Fed's decision to hold rates steady and push out the start of rate cuts to perhaps as late as December reflects its ongoing struggle to balance its inflation-fighting mandate with supporting economic growth. The Fed's next policy meeting is scheduled for July 25-26, at which time it will provide further updates on its economic outlook and monetary policy stance.
Source: Fed holds rates steady, sees just one cut in 2024 despite inflation progress