On Wednesday, the US Federal Reserve raised interest rates by 25 basis points, continuing its fight to bring inflation down in line with its target. The federal funds rate now stands at 5-5.25 per cent — its highest level in around 16 years. However, there are indications that the US Fed will now likely pause the rate hike cycle. In its last meeting in March, the policy statement had said the committee “anticipates that some additional policy firming may be appropriate”. This framing has been dropped this time around. The more tempered statement points towards a more cautious approach, as the committee takes into consideration effects of the cumulative tightening on economic activity and inflation. Future decisions, as Fed Chair Jerome Powell said, will be taken on a “meeting by meeting” basis.
Recent data shows that even as inflation has moderated in the US, it continues to remain elevated. The price index (personal consumption expenditure) moderated from 5.1 per cent in February to 4.2 per cent in March. Core inflation, which excludes the volatile food and energy components, also remained high at 4.6 per cent. This suggests that interest rates may perhaps remain higher for longer. Powell himself has acknowledged this, noting that the “process of getting inflation down has a long way to go”. Tighter policy will depress consumption and investment demand, weighing down economic activity. As per the projections accompanying the last policy statement, median expectations of change in GDP were at 0.4 per cent in 2023 with the unemployment rate at 4.5 per cent. There are indications of the labour market softening. As per reports, labour market data shows that job openings declined while layoffs rose in March. Powell has admitted to the downside risks to growth, saying that “the case of having a recession, I don’t rule that out either: It’s possible that we will have what I hope would be a mild recession”.
