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The Federal Reserve left rates unchanged at 5.25-5.50%, as expected. However, the orientation has radically changed: in the initial statement the “old” reference to any “additional monetary policy restriction” disappears and there is open talk of a cut in the cost of credit, albeit not an immediate one. More explicitly, Fed President Jerome Powell, in a press conference, explained that a cut in March “is probably not the most likely hypothesis”, while leaving the option open (“but this remains to be seen”). In any case, the budget reduction policy will be reviewed in March.
Looking for more confidence
With the new choice of words, the Fed wanted to acknowledge the fact that the economy has entered a new phase, but it also wanted to cool market optimism. «The (monetary policy) Committee – explains the official statement – believes that it will not be appropriate to reduce the (rate) corridor until it has greater confidence in the fact that inflation will move in a sustainable way towards the 2% target”: a formula repeated several times by Powell.
An uninsured path
Continued progress in bringing inflation down, Powell explained, “is not assured and the future path is uncertain.” The Fed, he added, is not looking for “better data but the continuation of better data.” The question that arises is whether “six months of good inflation data is sending us a real signal” that price velocity is returning to target.
The risk: stable inflation but above 2%
Going into a bit of detail, Powell explained that a decline in employment would tip the scales towards a closer rate cut, while with stickier, higher inflation, “or something like that”, the Fed will move towards a longer wait. The real risk, according to Powell, is not a rise in inflation, but its stabilization at levels higher than 2%.
Rates “probably” at the maximum
In any case, the cautionary clause according to which the Fed remains ready to change its orientation in the event that risks emerge that prevent the achievement of the objective remains in the statement without any surprises. Powell explained that monetary policy has “probably reached the peak of the restrictive cycle”, repeating that rates will remain at the appropriate level “for as long as necessary”.
2024-01-31 19:41:15
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