Washington (United States) (AFP) – The US Federal Reserve raised its inflation forecast Wednesday as it held interest rates steady, citing an “uncertain” economic outlook due to the war in Iran. The 11-1 vote on the benchmark lending rate was widely expected, but nonetheless defied US President Donald Trump’s demands for a reduction as the world’s largest economy battles stubborn inflation and weak labor demand. Rates were kept steady at a range of 3.50 percent to 3.75 percent, with officials flagging one expected cut by the end of the year.
But the Fed raised its inflation outlook, now expecting its preferred personal consumption expenditures (PCE) measure to stand at 2.7 percent by December 2026, up from an earlier estimate of 2.4 percent. “In the near term, higher energy prices will push up overall inflation,” Fed Chair Jerome Powell said, referring to steeper costs from the war in the Middle East. “But it is too soon to know the scope and duration of the potential effects on the economy,” he told a press briefing after the Fed’s policy meeting. Powell refused to be drawn into sharing specifics of his expectations for how the war could affect the US economy. “We’re right at the beginning of this, and we don’t know how big — you just don’t know how big this will be and how long it lasts,” he said, adding that the Fed would have to “wait and see.”
Trump has repeatedly insulted and criticized Powell for not slashing rates more aggressively, and in January, the Fed chair revealed that the US Justice Department had opened an investigation into him related to cost overruns on renovations at the bank’s headquarters. On Wednesday, Powell was also adamant that he would not leave the Fed’s board when his term as chair is over in May — his tenure as governor ends in 2028 — until the investigation is completed. “I have no intention of leaving the board until the investigation is well and truly over, with transparency and finality,” Powell said.
– ‘Difficult situation’ –
The central bank had cut rates three consecutive times late last year before holding them steady at its January meeting. It has a dual mandate of maintaining inflation near a long-term target of two percent while ensuring maximum employment. With war in the Middle East causing oil prices to spike, potentially fuelling widespread inflation and curbing growth, analysts said policymakers were unlikely to make any immediate moves. Affordability has been a key political issue for Trump, who has repeatedly called for rates to be cut even as price increases remained stubbornly high.
“Uncertainty about the economic outlook remains elevated,” the Fed said Wednesday, while noting that economic activity was “expanding at a solid pace.” “Job gains have remained low, and the unemployment rate has been little changed in recent months. Inflation remains somewhat elevated.” The Fed also released its quarterly summary of economic projections, expecting fourth-quarter GDP growth to come in at 2.4 percent year-on-year, and keeping its unemployment outlook steady at 4.4 percent. Powell conceded that policymakers were in a “difficult situation” with two competing mandates, but that the current rate level was “the right place to be” to balance risks to inflation and unemployment.
– Single dissenting vote –
The only dissenting voice on Wednesday came from Fed Governor Stephen Miran, a close ally and former economic advisor of Trump, who voted for a quarter-point cut to interest rates. But the Fed’s statement defied analyst expectations of a more fragmented Fed amid diverging pressures. KPMG chief economist Diane Swonk said that while it was easy to read the Fed’s statement as only indicating rate cuts on the horizon, the “devil is always in the details.” Swonk told AFP the economic projections indicated that more policymakers were worried about declining growth with rising unemployment and inflation, a situation she described as “stagflation-esque.”
At the press briefing, Powell played down the risk of stagflation, saying he would reserve the term “for a much more serious set of circumstances.” He appeared bullish about future prospects, while noting the uncertainty inherent in the current moment. “The US economy is doing, you know, pretty well,” he said. “It’s just we don’t know what the effects of this will be, and really no one does.”
© 2024 AFP
