The Federal Reserve is striving to manage high inflation without disrupting the ongoing economic expansion, according to its latest forecast released on Wednesday. The central bank aims to achieve a "soft landing," a scenario where inflation is controlled by higher interest rates without leading to a recession. This outcome has only been achieved once by the Fed since World War Two.
Fed's new figures indicate an estimated economic growth rate of 2.1% in 2023, which is expected to slow down to 1.5% in 2024 before regaining momentum. Inflation is projected to decrease from an estimated 3.3% at the end of this year to 2.5% in 2024 and further down to 2.2% in 2025, based on the Fed's preferred PCE price measure. By these estimates, inflation is anticipated to reach the Fed's target of 2% by 2026.
A few months ago, Fed officials were uncertain about achieving this delicate balance and even foresaw a potential recession. However, if the new forecasts are precise, the central bank plans to start reducing interest rates in 2024. The latest summary of economic projections indicates two quarter-point cuts next year instead of four, reinforcing the Fed's strategy of maintaining "higher for longer" interest rates to effectively combat inflation.
Opinions among the Fed's core team are divided regarding next year's approach. While some advocate for a more significant reduction in interest rates, others propose keeping them close to current levels.
On Wednesday, the central bank kept its benchmark interest rate within a range between 5.25% and 5.50%, allowing room for one more potential increase this year. Before this decision, Wall Street DJIA investors had predicted that the first reduction in interest rates next year would happen in June.
However, some economists express doubts about the Fed's ability to achieve its 2% inflation target without additional rate hikes, given the unexpected resilience of the economy and labor market. The current unemployment rate is 3.8%, expected to rise slightly to 4.1% by next year but not beyond. This low figure could continue to drive wage increases, contributing to inflation.
Fed officials attribute the recent decrease in job openings and hiring slowdown to previous interest-rate hikes. They expect labor demand will further soften in the coming year, reducing pressure on companies to raise wages, especially if inflation decreases. A lower inflation rate would boost Americans' purchasing power, even if their salaries do not rise as quickly.
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