FED: “Momentary pause as more increases are expected in the future.”  

After inflation decelerated to an annual rate of 4% during May (the lowest since March 2021) and in line with expectations, the FED kept the reference rate range unchanged at 5 – 5.25%. With this, it put a halt to the cycle of eleven consecutive increases. The decision was unanimous.

Inside the statement, the Federal Open Market Committee (FOMC) emphasized that keeping the reference rate range stable allows it to evaluate additional information and its implications for monetary policy. Additionally, it expressed that, to determine the degree of additional tightening that could be appropriate, the Committee will take into account everything that has been implemented so far, the lags with which monetary policy affects economic activity. In particular, it will evaluate the readings on labor market conditions, inflationary pressures and inflation expectations, and financial and international developments. In this context, it reiterated its firm commitment to return inflation to its 2% target.

On the other hand, the FED updated its macroeconomic forecasts; where it highlighted that the federal funds rate could close the year at 5.6% (vs. 5.1% projected in March). This scenario represents another two 25bp increases eventually. For 2024, the new estimate was also revised upwards to 4.6% from 4.3%; however, the outlook for lower rates compared to 2023 is maintained (5.6% vs. 4.6%). Regarding the economic panorama, the expected growth for this year was positively revised to 1% from 0.4%. In this regard, the Committee members were more optimistic about labor conditions, forecasting an unemployment rate of 4.1% by the end of the year (vs. 4.5% projected in March). However, by 2024 there could be a deterioration, which would bring the unemployment rate to 4.5%. Finally, for core inflation (excluding food and energy), the new estimate was revised slightly upward to 3.9% from 3.6% in March. Positively, the expectation for 2024 remained unchanged at 2.6%.

During his press conference, Jerome Powell reported that the full effect of all the monetary tightening is not yet reflected, although much ground has been gained in the battle to contain inflation.

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