At its meeting today, the Federal Reserve Board decided to keep the cash rates target at 4.35 percent and the interest rates paid on exchange settlement balances at 4.25 percent. This decision is a continuation of current policies aimed at stabilizing the financial market.
Although core inflation has risen significantly, there has been some notable improvement. Inflation has fallen significantly since its peak in 2022, as higher interest rates have helped rebalance aggregate demand and supply. However, core inflation measures remain at 3.5 percent, which remains far from the target midpoint of 2.5 percent.
Based on the latest projections published in the November Monetary Policy Statement, inflation is not expected to return to the target midpoint sustainably until 2026. However, the Federal Reserve is confident that inflationary pressures are beginning to ease. These projections support the Board’s view that inflation is on the way down, although risks remain.
Monetary policy is expected to remain flexible in dealing with future economic variables. The Board also notes the importance of continuing to monitor all economic indicators to ensure market stability. The Monetary Policy Statement stressed the importance of taking careful decisions that take into account all current economic challenges.
Economic Outlook: Challenges, Opportunities Ahead and Rates
The economic outlook remains uncertain at this time. Although core inflation remains elevated, recent data on economic activity has been mixed. Overall, it was weaker than expected in November
GDP growth has been notably weak. The national accounts for the third quarter of September show that the economy grew by just 0.8% over the past year. This represents the slowest growth since the early 1990s and indicates the ongoing effects of the COVID-19 pandemic on the economy. Low real disposable income and tight financial conditions continue to weigh on household consumption spending.
US Economic Outlook: Outlook and Prospects
On the labor market, a range of indicators suggest that conditions remain challenging. Despite gradual improvements in some indicators, some have recently stabilized. The unemployment rate was 4.1% in October, compared with 3.5% in late 2022. However, employment growth was strong in the three months to October. The labor participation rate remained close to record highs. However, job openings continued to rise, reflecting strong demand for labor.
At the same time, cyclical labor market indicators have recently eased. These include unemployment rates and youth underemployment. These changes may signal the beginning of an improvement in the labor market situation.
Economic conditions are expected to continue to influence future policy. Closer monitoring will be required to assess the longer-term implications of current conditions. Ultimately, monetary and fiscal policies will remain accommodative in line with economic challenges, with the aim of achieving stability and sustainable growth.
Wage pressures eased more than expected in November, according to the Wage Price Index report. Wage growth was 3.5% over the year through Q3 2023. This is lower than the previous quarter, although labor productivity growth remains weak.
Based on recent data, the Fed sees monetary policy as remaining accommodative and performing as expected. Risks to inflation have generally receded. Although aggregate demand continues to outpace supply in the economy, the gap between them continues to gradually close. This dynamic suggests that the economy is improving.
The main outlook is for household consumption to grow as incomes rise. Data for the September quarter show that both incomes and consumption recovered more slowly than expected. However, more recent data suggest that consumption began to recover in October and November. The recovery could be slower than expected, which could weigh on economic output growth and the labor market.
Monetary Policy Report: Challenges and Opportunities Ahead
There is a risk that any recovery in consumption could be slower than expected, leading to continued weakness in output growth and a deterioration in the labor market. Under these circumstances, there is considerable uncertainty about the impact of monetary policy and how firms will respond to pricing and wage decisions in a context of slow growth and weak productivity. Labor market conditions remain tense, adding further complexity to the outlook for economic growth.
As pressures on the economy persist, monetary policy is expected to remain flexible in the face of future developments. The Fed will continue to closely monitor all economic indicators to ensure that the right balance between inflation and economic growth is achieved.
There remains a high level of uncertainty about the economic outlook abroad. Most central banks have eased their monetary policy recently, as they grow more confident that inflation is moving sustainably towards their targets. However, they indicate that they remain cautious in their decisions, monitoring risks that could emerge in both directions. The most prominent of these risks are weak labor markets and strong inflation.
The return of inflation to its target level sustainably remains the main priority. The Fed places this objective at the forefront of its priorities. This is consistent with its mandate to achieve price stability and full employment. To date, long-term inflation expectations have been consistent with the stated objective. It is important that these expectations remain consistent.
Although headline inflation has declined significantly, it is expected to remain low for some time. On the other hand, core inflation suggests that there is increasing momentum in inflation, which means that the situation continues to require close attention. The projections in the November Monetary Policy Report suggest that it will take time before inflation sustainably reaches the target range.
Inflation and Labor Market Outlook
The Board will continue to rely on data and an evolving assessment of risks in making its decisions. In this context, it will pay particular attention to developments in the global economy and financial markets, as well as trends in domestic demand and the outlook for inflation and the labor market. While economic challenges persist, the Board remains resolute in its determination to return inflation to its target. It will continue to take the necessary steps to achieve this objective, whatever the requirements. Maintaining price stability is the primary objective, and the Board will seek to ensure that this is achieved within a reasonable timeframe.
