(TrendHub KR – Posts by ICARUS Journalist) The Federal Reserve, the central bank of the United States, decided to keep the federal funds rate unchanged at 5.25~5.50% on January 31st (local time). This marks the fourth consecutive hold on interest rates, maintaining the rates at their highest level in 23 years. Contrary to Wall Street’s expectations, this decision pushes back the prospect of rate cuts within this year.
The Fed has raised rates 11 times since March 2022 as a measure to combat the highest inflation in decades. Inflation has significantly eased since then, moving closer to the Fed’s 2% target. This has raised expectations that the Fed would cut rates in 2024. However, the Fed’s recent policy statement, released Wednesday, overturned expectations of the first rate cut happening in March.
The Fed stated in its policy statement, “The Committee does not expect it will be appropriate to reduce the target range for the federal funds rate until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” This serves as the Fed’s latest reality check for Wall Street on rate cuts.
Fed officials have been communicating this sentiment for weeks now, and Wednesday’s statement is another signal from the Fed that investors need to recalibrate their bets. Wall Street has gradually been accepting the Fed’s guidance. In early January, futures indicated that rate cuts were highly likely to happen in March, but those odds have since declined and may continue to do so.
Generally, a rapidly weakening economy threatening job losses is a clear reason for the Fed to start cutting rates. However, the US economy remains in good shape, with low unemployment and positive economic growth. Inflation has not yet reached the Fed’s 2% target, and the latest policy statement maintained its usual phrase stating that it “remains elevated.”
Fed Chair Jerome Powell has mentioned that rates should be cut before inflation reaches 2% because it is widely understood that monetary policy has a lagged effect on the broader, real economy. Officials are also considering the effects of rising ‘real’ interest rates, which occurs when inflation decreases but interest rates remain high, unnecessarily squeezing the economy and risking job losses. The Fed is striving to achieve its dual mandate of stabilizing prices and maximizing employment, with a high possibility of achieving a ‘soft landing,’ a rare outcome where inflation is defeated without a spike in unemployment.
The Fed is weighing the risk that the slowdown in inflation could stall or even reignite against the risk that the Fed’s previous 11 rate hikes could inadvertently weigh too heavily on the economy, increasing unemployment. According to Wednesday’s statement, these risks are “moving into better balance.”
“We seem to be heading towards a soft landing scenario,” said Subadra Rajappa, head of US rates strategy at Société Générale, to CNN. “But the market has priced in 150 basis points of cuts, which has led to this significant easing of financial conditions, and that could potentially delay the timing of any sort of monetary policy normalization.”
Dual Insight Analysis:
Positive Investment Perspective:
- Stable Economic Growth: The US economy continues to exhibit strong growth, providing investors with a stable investment environment. The Fed’s decision indicates that the economy can grow without the pressure of inflation, creating long-term investment opportunities.
- Expectations for Rate Cuts: Once the Fed begins cutting rates, it will provide additional stimulus to the economy, especially benefiting sectors sensitive to interest rates. Investors can leverage this to find investment opportunities in various industry sectors.
Negative Investment Perspective:
- Risk of Delayed Rate Cuts: The delay in rate cuts by the Fed can increase uncertainty in economic growth, particularly burdening investors related to financial markets.
- Ongoing Battle with Inflation: If inflation does not reach the Fed’s target, it could increase the risk of future rate hikes. This adds uncertainty to the market, prompting investors to adopt a more conservative approach.
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