February 08, 2024

What are the factors that hinder the reduction of interest rates in the United States?

In this article, we will explore the reasons behind the delay in the interest rate cut in the United States and analyze the economic and political outlook that is influencing this decision. Throughout the text, we will examine the evolution of the US economy, the results of inflation and the labor market, as well as the statements of the Chairman of the Federal Reserve, Jerome Powell, on monetary policy and interest rates.

The US economy in numbers

Last week, it was announced that the United States closed 2023 with gross domestic product (GDP) growth of 3.1%. This result exceeded economists' estimates and was greater than the growth recorded in 2022, the year in which the economy experienced a technical recession. Despite inflation, increased consumer spending contributed to this solid growth.

The decision to maintain interest rates

The US central bank decided to keep interest rates between 5.25% and 5.5% at its last meeting. Jerome Powell, Chairman of the Federal Reserve, explained that this decision was based on the positive balance of the US economy, which has shown solid growth over the past year. Powell highlighted the strong labor market and good inflation data as key factors in keeping rates at their current level.

Rate cut prospects

Despite keeping rates at their current level, Powell announced that there will be cuts this year. However, these cuts are not expected to occur at the next meeting of the Federal Open Market Committee (FOMC), which will take place in March. According to Powell, the US economy is evolving positively, but more time is still required to evaluate its performance before implementing new cuts.

The policy rate at its peak

Powell noted that the Fed's policy rate is likely at its peak for this tightening cycle. This indicates that at some point this year, interest rates are expected to begin to decline. However, Powell also emphasized that this decision will depend on the evolution of the economy and whether general expectations are met.

Positive balance of the economy

The president of the Federal Reserve highlighted the positive balance of the US economy. Over the past year, the economy showed solid growth, a strong labor market, and unexpected results in terms of inflation. Although inflation has seen recent declines, Powell stressed that the important thing is to maintain the continuity of good data rather than waiting for even better data.

Uncertainty and economic prospects

Despite the positive balance, Powell mentioned the uncertainty in the economic outlook and continued attention to inflation risks. As the US economy normalizes and the supply chain and labor market stabilize, the economy is expected to moderate in the coming months. This moderation can influence interest rate decisions.

Evaluation of inflation and the labor market

The Federal Reserve evaluates a wide range of information about inflation and the labor market to make monetary policy decisions. According to the latest data, inflation closed last year at 3.4%, compared to 6.5% at the end of 2022. The Fed has made four rate hikes in 2023 and a total of eleven since March 2022 Despite these increases, the labor market remains strong, with a steady increase in new jobs and a stable unemployment rate.

Future perspectives

The next meeting of the Federal Open Market Committee is scheduled for March, but a rate cut is not expected to be announced at that time. Powell explained that a sufficient level of confidence is needed to announce a reduction, and currently, the economic outlook is uncertain. The Federal Reserve will continue to carefully evaluate inflation risks and developments in the economy before making interest rate decisions.

Conclusion

The delay in cutting interest rates in the United States is due to a combination of factors, including the positive balance of the economy, the results of inflation and the labor market, as well as the uncertainty in the economic outlook. Although rates are expected to begin lowering sometime this year, the Federal Reserve will continue to carefully evaluate developments in the economy before implementing further cuts.