Interest rates stay unchanged: When could the FED make cuts to help borrowers?

The Federal Open Market Committee (FOMC) of the United States Federal Reserve has announced that it will maintain its target range for interest rates for the sixth consecutive meeting. The current rate range sits between 5-1/4 to 5-1/2, the highest level since January 2001. The US central bank reported this decision on Wednesday after the FOMC wrapped up its May meeting.

“The Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the Fed’s governing body announced. Additionally, the Committee warned that it does not expect to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%.

Federal Reserve Chair Jerome Powell emphasized that he will continuously monitor the incoming information to evaluate the appropriate monetary policy stance taken by the central bank. He also added that he would be willing to adjust the bank’s monetary policy if any risks may hinder the achievement of objectives to maintain conditions for full employment and stabilize prices. Under Powell’s leadership, the US central bank raised interest rates consecutively eleven times between March 2022 and July 2023 to combat the rising cost of living.

Last week, the Bureau of Economic Analysis (BEA) at the US Department of Commerce reported that the personal consumption expenditure price index, the Fed’s preferred measure for tracking inflation, was at 2.7% year-over-year in March. This figure is two-tenths higher than the previous month of February.

How is the US GDP evolving?

According to the first estimate published by the BEA, the US gross domestic product (GDP) grew by 0.4 percent in the first quarter of this year. This was half of the 0.8 percent growth tracked in the fourth quarter of 2023. In annualized figures, the US economy grew by 1.6 percent between January and March, compared to 3.4% in the previous three months.

Following its decision to maintain rates on Wednesday, the Fed has made it clear for the European Central Bank (ECB) to take the initiative in reversing the monetary cycle. The ‘guardian of the euro’ has expressed its willingness to undertake a first-rate cut in June if there are no surprises in the incoming data.