The Federal Reserve kept interest rates unchanged at their latest meeting, signaling only one more hike in this cycle.
The American Federal Reserve is “focused on the double mandate” for President Joe Biden, Chairman Jerome Powell said during yesterday’s press conference. The Federal Reserve met between Tuesday and Wednesday to decide its monetary policy.
Markets fully priced in a pause in rate hikes and were not contradicted by the Fed. At its latest meeting, the Fed brought interest rates to their 22-year high: 5.25%.
While the Fed’s decision to pause rate hikes was highly anticipated, the question remained on its future monetary strategy. Powell answered with a “higher for longer” approach, with just 2 cuts forecasted for 2024.
Inflation in the United States has significantly come down during this year but still remains above the Fed’s 2% target. Consumer prices increased by 0.8% between July and August, proving that inflation was coming down too cautiously.
On the other hand, the US economy proved incredibly resilient to rate hikes, with GDP defying market expectations. The Fed now predicts a GDP growth of 1.5% in 2024, up from the previous forecast of 1.1%.
Although the Fed’d prediction often turned out to be inaccurate, a recession is seemingly out of the picture. The committee realized the economy was growing at a strong pace. “We don’t see a singular upcoming bearish catalyst,” said deputy chief investment officer at Goldman Sachs Alexandra Wilson-Elizondo, “although strikes, the shutdown, and the resumption of student loan repayments collectively will sting and drive bumpiness in the data between now and their next decision.”
The dot plot released after the press conference shows another hike is coming in 2023, but it will be the last of this cycle.
A nod to Joe Biden
With the upward GDP revision, Jerome Powell is putting recession fears to rest, at least for the moment. By leaving interest rates unchanged, American businesses and banks will not feel more fiscal pressure and will be allowed to more or less thrive.
Next year, the 2024 elections will decide the future President of the United States. Joe Biden, the incumbent candidate, is currently head-to-head with Donald Trump, the main Republican challenger in the national polls.
A recession during the election year would worsen Biden’s chances of being re-elected. The short-term economic performance is extremely important for a president’s public support and is considered one of the “Keys to the White House” by historian Alan Lichtman.
Leaving interest rates high will ensure a slower fall in inflation. However, it will also preserve the country from an economic recession, helping Joe Biden gain a second term.
