Federal Reserve Announces Plans for Single Interest Rate Cut in 2021
The Federal Reserve, the central bank of the United States, has released updated forecasts indicating that interest rates will be cut just once this year. Despite a recent drop in inflation rates to 3.4%, the cost of borrowing in the US will remain at a more than 20-year high.
The Fed’s interest rate-setting committee published new guidance, stating that they anticipate only one rate cut this year, a significant change from their previous forecast of three cuts. The committee also noted that further evidence of falling inflation will be needed before any cuts are made.
According to Fed chair Jerome Powell, this decision is largely due to the low unemployment rate in the US. However, he also mentioned that rates could be brought down if unemployment were to quickly increase.
Central banks around the world have been raising interest rates in an effort to control inflation, which has been on the rise due to pandemic-related supply chain issues and the energy price shock caused by Russia’s invasion of Ukraine.
In comparison, the Bank of England, the central bank of the UK, does not provide interest rate forecasts. However, market data from Refinitiv suggests that three rate cuts are expected this year, with the first one potentially happening in September. This is a change from previous expectations, as it was initially hoped that the first cut in over four years would occur in May. However, the Bank of England decided to keep rates at 5.25%.
Unlike the UK, the US interest rate is a range (currently 5.25% to 5.5%) rather than a single percentage. The Fed does not set a specific figure.
The announcement from the Federal Reserve did not have a significant impact on the markets, as they had already seen strong gains following the release of the inflation figures earlier in the day. The US stock market indexes, including the NASDAQ and S&P 500, remained elevated after the news. The British pound also saw a boost, with one pound equaling $1.2799.