US Federal Reserve holds interest rates steady, hinting at cautious future cuts; US dollar falls, while stock markets climb following the announcement.
The Federal Reserve left interest rates unchanged for a fifth straight time at its meeting on March 20. The US dollar fell against the major currencies following the announcement.
The Federal Open Market Committee (FOMC) approved the pause, which kept the benchmark interest rate in the target range of 5.25 percent to 5.50 percent. The Fed last raised rates in July, and it’s very likely that rates have peaked. The key question facing policy makers is when to start lowering interest rates.
The Fed also released its latest economic projections and revised GDP to 2.1%, up from 1.4% in December. This is an indication that the US economy has been surprisingly resilient in the face of elevated interest rates.
The decision to hold interest rates was widely expected, which left investors looking for insights regarding future rate policy; specifically, the number of rate cuts the Fed plans to make this year. At the December meeting, the Fed’s “dot plot”, which is a chart of the projection of rate moves, indicated the Fed expected three rate cuts in 2024. The Fed reaffirmed the dot plot at Wednesday’s meeting. Market pricing of an initial rate cut in June was not affected by the meeting and remained at around 75%.
The FOMC statement had a cautious tone, noting that inflation has eased but “remains elevated” and that the Fed will not lower rates until it has “gained greater confidence that inflation is moving sustainably towards 2 percent.”
Fed Chair Powell acknowledged at his press conference that the economy is strong and inflation has fallen sharply, but also warned that “inflation is still too high, ongoing progress is not assured, and the path forward is uncertain.”
The takeaway from the meeting is that inflation is moving in the right direction but the battle against inflation is not over and the Fed is not in any rush to start lowering rates.
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The US dollar posted losses against the major currencies on Wednesday, following the rate announcement. The EUR/USD currency pair rose 0.47% and the GBP/USD currency pair climbed 0.48% following the rate announcement. The US dollar sustained higher losses against risk currencies like the AUD/USD currency pair, which climbed 0.67% after the announcement.
In the US, the major stock indices posted strong gains on Wednesday.
The S&P 500 Index rose 46.11 points (0.89%) to close at a record high or 5,224.62 while the Nasdaq 100 Index surged 207.90 points (1.15%) to close at 18,240.11.
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