The Fed kept interest rates unchanged for the fifth consecutive time

The US Federal Reserve (Fed) on March 20 kept the reference interest rate unchanged at a 22-year peak, and forecast to reduce interest rates 3 times this year.

On March 20, as expected by the market, the Fed decided not to raise interest rates after a two-day policy meeting. Reference interest rates in the US are currently around 5.25-5.5% - the highest in 22 years. In the previous 4 meetings, this agency also kept interest rates unchanged.

The Fed has raised interest rates 11 times since March 2022 to curb inflation. US inflation is also slowing down significantly compared to its 40-year peak last summer. Last week's data showed that the consumer price index in February increased by 0.4% over the previous month and 3.2% over the same period last year.

Fed Chairman Jerome Powell at a press conference on March 20. Photo: Reuters

However, Fed officials are leaning towards the possibility of keeping interest rates at high levels for a longer time than expected. This is to prevent inflation from stalling above 2% - the Fed's target, or even skyrocketing again.

By the end of 2025, the Fed expects to bring the reference interest rate to 3.9%, implying 3 interest rate cuts, each by 25 basis points (0.25%) this year. However, at the December 2023 meeting, they forecast the interest rate at the end of 2025 to be only 3.6%.

Until the next session in June, the US will receive some more inflation and employment reports, meaning the situation could change a lot. Cooling inflation will strengthen expectations that the Fed will start cutting interest rates from June. On the contrary, accelerating inflation will push back this forecast.

Fed officials currently believe that the increase in the personal consumption expenditures price index (PCE) - their preferred inflation measure - will reach 2.4% by the end of this year. However, core PCE may be only about 2.6%. In December 2023, the Fed forecast both of these figures to be 2.4%.

In general, the new forecasts show that the Fed believes the US economy will continue to have a "soft landing" - controlling inflation without causing a recession. Fed officials think the US can grow 2.1% this year and 2% next year - higher than the December 2023 forecast. The unemployment rate is also expected to be 4% by the end of this year, down from the previous forecast.

During a press conference on March 20, Fed Chairman Jerome Powell affirmed that recent high inflation figures have not changed the trend of reducing price pressure in the US. However, he emphasized that they also show that the Fed cannot yet be confident that it has won the battle against inflation.

"We want to be cautious," Powell said. This means that Fed officials will not rush to loosen as the economy and job market continue to be vibrant.