The US Fed pencils in an interest rate cut this year

  • author, Charlotte Edwards
  • stock, BBC Business Correspondent

The US Federal Reserve has signaled that it will cut its key interest rate only once this year, despite easing inflation.

In March, the central bank was expected to cut borrowing costs three times by the end of 2024.

However, on Wednesday, new forecasts from central bank officials that make decisions on rates were penciled in for a single cut.

The fresh outlook emerged after the central bank voted to keep interest rates at their current 23-year highs despite easing inflation.

Inflation, which measures the pace of price rises, eased to 3.3% in the year to May. This compares with 3.4% in the 12 months to April.

However, inflation remained unchanged between April and May and is above the central bank’s 2% target.

Federal Reserve Chairman Jerome Powell said only “modest” progress had been made toward the target and that the central bank would need to see “good inflation readings” before cutting interest rates.

US interest rates were at 5.25% – 5.5%.

Anastasia Fedick, assistant professor of finance at the Haas Business School at the University of California, Berkeley, told the BBC’s Today programme: “We’ve got some good news in terms of better inflation numbers.

“But the central bank is still very cautious, so they’re signaling that they’re going to do something in the near future, most likely, a rate cut and it’s not going to be huge.”

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said it was “unnecessarily aggressive” to cut forecasts for a three-to-one rate cut this year.

Economists at Wells Fargo called it a “close call” between one or two cuts in 2024.

US Federal Reserve officials are divided on how much interest rate cuts they expect this year. Of the 19 policymakers who gave their outlook, four expected no cuts, seven predicted one cut, and eight thought there would be two.

Forecasts by the US Federal Reserve showed a modest cut to 5%-5.25%.

Mr Powell acknowledged that cutting the rate would not have a major impact on the US economy.

But when a cut finally comes it will be “a consequential decision for the economy,” which “you want to get right,” he said.

Although inflation has eased slightly, the US job market remains strong. The latest data showed that U.S. employers added 272,000 jobs in May — more than the 185,000 expected.

Ms. Fedyk said: “The Fed is trying to react to the data, but not overreact to the data.”

Some other major economies have cut interest rates, including the European Central Bank and the Bank of Canada.

But the US and the UK – have yet to take similar action. The Bank of England meets next week and is widely expected to keep interest rates at a 16-year high of 5.25%.

Consumer Price Index (CPI) inflation has now eased significantly to 2.3% from a peak of 11.1% in October 2022.

Earlier this week, Ruth Gregory, deputy chief UK economist at Capital Economics, said: “Overall, the stickiness of wage growth, as well as other indicators, will not prevent the Bank from cutting interest rates for the first time in August, as we forecast. Wage settlement data and next week’s CPI inflation release etc. show good progress.”

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