The US Federal Reserve on Wednesday left its key lending rate unchanged and penciled in just one rate cut this year, down from the three expected in March after inflation stalled in the first quarter.
The Fed voted unanimously to keep its benchmark interest rate between 5.25 and 5.50 percent, and said that “modest” progress had been made toward its long-term inflation target of 2 percent.
The announcement suggests that central bank officials remain wary about cutting rates too soon, despite consumer inflation data published earlier on Wednesday, which pointed to a slowdown in the rate of price increases last month.
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The annual consumer price index came in at 3.3 percent last month, down 0.1 percentage point from April and unchanged on a monthly basis, the US Department of Labor said. This was slightly below expectations.
Fed Chairman Jerome Powell welcomed the inflation data during a press conference on Wednesday, but added that the US central bank needs to see more “good inflation readings” before it gains sufficient confidence to consider cutting interest rates.
If the US economy remains strong and inflation persists, the Fed would be “prepared to maintain the current target range for the federal funds rate as long as appropriate,” he added.
The surprise of the day came in the Fed’s updated economic forecasts from the 19 members of its rate-setting Federal Open Market Committee (FOMC).
Policymakers lowered their individual forecasts for the number of rate cuts they expect this year, reducing the median projection for the end of the year to the midpoint between 5.0 and 5.25 percent.
This means that FOMC participants only expect one 0.25 percentage point cut before the end of the year — two fewer than in the last update in March.
In addition, FOMC participants penciled in a median of four quarter percentage-point cuts for next year, and an additional four in 2026.
In their economic forecasts, Fed officials also raised the forecast for headline inflation this year to 2.6 percent, up 0.2 percentage points, and kept their growth outlook unchanged at 2.1 percent.
Policymakers then expect both growth and inflation to moderate further next year.
Asian traders yesterday extended a rally across world markets as they welcomed figures showing US inflation slowed further last month, tempering concerns about the Fed’s forecast of just one interest rate cut this year.
Investors are now keeping an eye on the yen, as the Bank of Japan started a two-day policy meeting, with speculation that it is preparing the ground for a further tightening after lifting interest rates in March for the first time in 17 years.
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