The Federal Reserve announced on Wednesday that it would keep interest rates at their current levels Amid improving consumer confidence and declining inflation rates.
Ahead of Wednesday's announcement, some central bank officials have been signaling that the current rate is enough to push inflation toward the central bank's 2% target.
The federal funds target rate has been 5.25% to 5.5% since last summer, following 11 increases starting in March 2022, and the rate sets a benchmark for other interest rates across the economy — from credit cards to mortgages and business and auto loans.
Some economists believe that these high rates have helped reduce inflation.
In December, the key gauge of consumer-focused inflation, the 12-month consumer price index, came in at 3.3% — little changed from the previous month's 3.1% reading.
The central bank's preferred measure of inflation, the personal consumption expenditure price index, came in even lower at 2.6%.
In comments this month, Fed Governor Christopher Waller said the combination of lower inflation and continued steady employment gains led to an economic landscape that was “almost benign.”
“The improvement in inflation that I noted, combined with data on economic and financial conditions and my outlook, gives me more confidence than I did in 2021 that inflation is on track for 2%,” he said in written comments. To the Brookings Institution, According to DHe Associated Press.
Meanwhile, two measures of consumer confidence show Americans are starting to feel more upbeat about the economy. On Tuesday, the Conference Board's consumer confidence index hit a two-year high based on what the business group said were “upbeat views of current conditions” and “low pessimism.” [the] the future.”
That followed a reading from the University of Michigan's consumer confidence survey earlier this month that reached its highest level since 2021.
Nevertheless, there are already some signals that post-pandemic economic growth has peaked. Fewer Americans left their jobs than in 2022, the U.S. Labor Department said on Tuesday, while the seasonally adjusted rate in December fell to the lowest monthly level in nearly three years.
Economists believe that workers are more willing to leave their jobs if they believe that a better opportunity awaits them.
“On balance, various labor market indicators show that the labor market is doing well, but there are signs of weakness, such as low hiring rates and a rising unemployment rate,” analysts at Citibank said in a note to clients on Tuesday. “We will continue to watch jobless claims data as one of the timely indicators for the labor market.”
At 3.7%, the unemployment rate has now returned to pre-pandemic levels, although it is up from the post-pandemic low of 3.4% seen in January 2023. Four-month moving average of weekly initial jobless claims No meaningful increase was seen in the post-pandemic era.
But layoff announcements abound in January, especially in white-collar jobs Technology and the media.
“Rising reports of localized layoffs confirm that labor market conditions are not as strong as they were a year ago and that some weaknesses have emerged,” Lydia Boussour, senior economist at EY, said in a note to clients on Tuesday.
Still, traders believe the economy remains strong, and they have pegged the probability of the central bank's first rate cut in March. at 61.5% — down from a 73% probability a month ago. If the central bank actually cuts interest rates in March, it will be two years since it first started raising them to fight inflation.
Not everyone is optimistic about an imminent rate cut.
“We think markets are more optimistic that we will see a Fed rate cut in March,” Vanguard Chief Global Economist Joe Davis said in a note to clients on Tuesday.
“It will be mid-term before policymakers are confident they have controlled inflation enough to start lowering their target for short-term interest rates.”