U.S. Fed holds rates in place, predicts one cut this year

Federal Reserve Chair Jerome Powell holds a press conference in Washington, D.C., the United States, Sept. 20, 2023. (Photo by Aaron Schwartz/Xinhua)

The U.S. Federal Reserve kept interest rates unchanged, predicting one cut later this year despite cooling inflation. Fed head Jerome Powell indicated more data is needed for confidence in reaching the 2 percent inflation target. Recent CPI data showed a slight decrease, but inflation remains a concern, especially with upcoming elections.

WASHINGTON, June 12 (Xinhua) -- The U.S. Federal Reserve kept interest rates in place on Wednesday and predicted one rate cut later this year, as the latest consumer price data shows that inflation seems to be cooling.

Speaking at a press conference after the Fed's two-day meeting, Fed head Jerome Powell said that although recent inflation readings have "eased somewhat," it is not enough to create "greater confidence" that inflation is headed back toward the central bank's 2 percent target.

The Fed's announcement came just a few hours after the U.S. Labor Department reported that Consumer Price Index (CPI) in May increased 3.3 percent from a year ago, after climbing 3.4 percent in April and 3.5 percent in March.

Powell referred to the latest consumer price index, which revealed that prices eased more than anticipated in May, as "only one reading."

In a statement released Wednesday, the Federal Open Market Committee (FOMC), the Fed's policy-setting body, said there has been "modest further progress" toward the central bank's mandate of 2 percent inflation.

This latest meeting of the FOMC comes at a time when the Fed has hiked rates to record highs, in a bid to fight off the worst inflation in 40 years.

Inflation has proved more stubborn than anticipated, and the Fed has been careful not to take risks that would endanger its mandate of keeping inflation at 2 percent.

"Inflation remains above the Fed's target, and there have been enough false starts in the past that the FOMC likely will need to see at least a couple more rosy inflation reports to gain the 'greater confidence' needed to start reducing the federal funds rate," Sarah House and Michael Pugliese, economists at Wells Fargo Securities, noted in an analysis.

Barry Bosworth, economist and senior fellow at the Brookings Institution, told Xinhua that "Powell was cautiously optimistic that inflation will slow but not quickly."

"Interest rate cuts (are) unlikely until the fall. It risks getting tangled in the election process," said Bosworth.

Dean Baker, a senior economist at the Center for Economic and Policy Research, told Xinhua: "The Fed is clearly not anxious to cut rates or give the impression that it is about to cut rates."

"From the standpoint of their twin mandates, full employment and low inflation, it makes sense they would hold the course. But I see them as needlessly inflicting pain on people," Baker said, adding that there is a risk to financial stability with the high rates "creating serious problems for banks with a lot of exposure to commercial real estate."

"I still very much expect we will see one rate cut this year and quite likely two," Baker said.

Customers select goods at a supermarket in Foster City, California, the United States, May 15, 2024. According to the Labor Department's Bureau of Labor Statistics, the U.S. consumer price index (CPI) rose by 0.3 percent from March. (Photo by Li Jianguo/Xinhua)

According to the Fed's latest quarterly summary of economic projections released Wednesday, Fed officials' median projection of core personal consumption expenditures (PCE) inflation is 2.8 percent at the end of this year, up from 2.6 percent in March projection.

The quarterly economic projections also showed that Fed officials' median projection for the appropriate level of the federal funds rate will be 5.1 percent at the end of this year, up from the 4.6 percent in March projection.

The closely-watched dot plot, where each FOMC participant sees the fed funds rate heading, shows that seven out of the 19 members expect one 25-basis-point rate cut by end of this year, while eight members expect two cuts.

Some economists believe the Fed will hold off on doing anything drastic in this election year, as the central bank wants to avoid being seen as politicized.

Desmond Lachman, a senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund (IMF), told Xinhua that in the run-up to the election, "the Fed will not want to be seen as being politically motivated in its interest rate decisions. This means that the bar will be very high for the Fed to cut interest rates before the election."

The U.S. presidential elections are slated for November.

Since July 2023, the Federal Reserve has kept benchmark interest rates at 5.25 percent to 5.5 percent, a 22-year high.

High interest rates have made purchasing a home unaffordable for many young and low-income Americans.

At the same time, inflation has caused rents to soar and food prices to hit levels that have put a dent in people's wallets.

Record high inflation has become a major political issue, with Americans souring on the current administration because of high prices that kicked in during the first term of President Joe Biden.