US Federal Reserve Holds Rates, Eyes 3 Cuts in 2024

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The US Federal Reserve opted to maintain interest rates at a 23-year high in its latest meeting, marking the fifth consecutive hold, while outlining expectations for three rate cuts throughout the year.

This decision, as stated by the central bank, allows policymakers to scrutinize incoming data and assess the evolving economic outlook and risk balance. The Fed's stance reflects a cautious approach amidst the current economic landscape.

Last year saw the fruition of the Fed's policies, with a significant alleviation of inflation from the multi-decade highs of 2022, moving towards the Fed's long-term target of two percent. Additionally, the US managed to skirt a recession, bolstered by unexpectedly robust economic growth.

However, 2024 has brought its challenges, notably a slight uptick in monthly inflation rates, sparking concerns that interest rates might need to remain elevated for a prolonged period to rein in prices effectively.

Economists at JP Morgan noted a shift in expectations regarding central bank easing for 2024, though this adjustment hasn't disrupted the broader trend towards easing global financial conditions.

In tandem with the rate decision, the Fed revised its economic forecasts, notably upgrading the US growth outlook for the year to 2.1 percent from 1.4 percent projected in December. While the headline inflation forecast remained unchanged, there was a slight uptick in the projection for annual "core" inflation, excluding energy and food prices, to 2.6 percent.

The Federal Open Market Committee (FOMC) left the median projection for interest rates at the end of 2024 unchanged, implying an expectation of 0.75 percentage points in cuts before year-end, potentially translating to three 0.25 percentage point cuts.

This prediction diverges from December when the FOMC hinted at three cuts in 2024, raising hopes of an early reduction as soon as March. However, subsequent cautionary statements from Fed officials prompted a shift in market expectations, pushing the anticipated timeline for cuts from March to June or beyond.

Presently, futures traders assign a nearly 65 percent probability to the Fed initiating rate cuts by mid-June, rising to 80 percent by the end of July, according to CME Group data. Some economists anticipate a methodical cutting cycle every other meeting starting in June and extending through 2025.

Regarding the Fed's balance sheet, discussions are underway regarding when to taper the pace of asset sales acquired during the Covid-19 pandemic, aimed at supporting the then-ailing economy. Fed Chair Jerome Powell is expected to address these issues, alongside queries about the trajectory of interest rate cuts, during a press conference following the meeting.

In the broader context, the Fed's decision comes amidst the Bank of Japan's first interest rate hike in 17 years, which buoyed Tokyo's financial markets but led to a depreciation of the yen against the dollar. Meanwhile, other central banks, including the Bank of England, are slated to announce their interest rate decisions later this week.

Powell, speaking at the press conference, acknowledged the substantial easing of US inflation alongside a robust labor market but emphasized that inflation remains too high. He highlighted the uncertainty surrounding the path forward and the ongoing efforts to bring inflation down.

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