Michelle Bowman, a supporter of a less accommodative monetary policy, disagrees and votes against the reduction
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The Federal Open Market Committee (FOMC) of the United States Federal Reserve (Fed) decided on Wednesday to lower interest rates by 50 basis points for the first time since March 2020, leaving them within the target range of 4.75% to 5%.
In its statement, the bank stressed that it has “greater confidence” that inflation is converging steadily with the price stability target of 2% and that the risks to optimising employment and inflation are “more or less balanced”.
“Recent indicators suggest that economic activity has continued to grow at a good pace. Job growth has slowed and the unemployment rate has risen but remains low. Inflation has continued to move toward the Committee’s 2% target but remains somewhat elevated,” the Fed said.
The FOMC has indicated that when modifying the reference rate it will be attentive to incoming data, the evolution of the macroeconomic environment and the balance of risks.
In this regard, the issuing institute has assured that it will be “prepared” to adjust rates if necessary, for which it will analyze the readings of the labor market, inflation, as well as the effects derived from international and financial events.
On the other hand, all members of the Committee voted in favour of the half-point reduction, except for Michelle Bowman, who belongs to the ‘hawkish’ wing of the Fed, that is, in favour of a less accommodative monetary policy and a reduction of 25 basis points.
ECONOMIC FORECASTS
The Fed has also published an update to its macroeconomic forecasts, as well as its members’ estimates of the evolution of interest rates.
In June, FOMC members expected rates to be between 4.75% and 5.25% by the end of 2024, although some members were betting on even higher figures. The dot plot now shows that the majority of its members are betting on 4.5% or 4.75%, while one even sees 4.25%.
The Fed’s central projection is for interest rates to range between 4.4% and 4.6% in 2024, compared with the June projection of 4.9% and 5.4%. For 2025, the range is projected to be between 3.1% and 3.6%, compared with the previous forecast for a range of 3.9% and 4.4%.
As for macroeconomic developments, the issuing institute has largely maintained its outlook. Even so, it has revised the country’s GDP growth in 2024 downwards by one-tenth to 2%. Subsequently, the growth forecast for 2025 and 2026 has been maintained at 2% for both years. In 2027, the economy is expected to expand by another 2%.
Regarding unemployment, the Fed estimates that the country will have an unemployment rate of 4.4% in 2024, four-tenths higher than estimated three months ago. By 2025, it will remain stable at 4.4% and moderate by one-tenth per year until 2027, when it would remain at 4.2%.
Inflation, meanwhile, will be 2.3% at the end of the year, three-tenths less than in the June forecasts, while the underlying variable, which excludes energy and food prices from its calculation due to their greater volatility, will be 2.6%, two-tenths less. In 2025, the general index will be 2.1% and the underlying index 2.2%, while in 2026 both variables will coincide at 2%.
GDP, UNEMPLOYMENT AND INFLATION
The economy of the world’s leading power experienced an annualized growth of 3% of its GDP in the second quarter of 2024, compared to 1.4% in the previous quarter.
As for the US labor market, 142,000 non-farm jobs were created in August, while unemployment fell by one-tenth of a point to 4.2%. The US has now been creating jobs for 44 consecutive months.
The personal consumption expenditures price index, the Fed’s preferred statistic for monitoring inflation, stood at 2.5% in July, unchanged from the previous month. The monthly rate edged up to 0.2% from 0.1%. The underlying variable closed at 2.6% year-on-year, unchanged.
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