The Federal Reserve is signaling that it expects to raise interest rates at a slower pace this year, as new data indicates that inflation is likely to remain above its long-term target.
Fed Chairman Jerome Powell addressed the House Financial Services Committee this Wednesday, saying that the Federal Open Market Committee (FOMC) voted to hold benchmark rates steady. The FOMC has raised rates five percentage points since March 2022, and most of its members agree that additional increases may be needed later this year.
However, Powell noted that inflation remains “well above” the Fed’s long-term target of 2%. He pointed out that raising rates quickly could lead to a slowdown in economic growth.
The Fed’s updated economic forecasts published last week suggest that the central bank may need to increase rates by a half percentage point in 2019. Nonetheless, Powell’s comments suggest that whatever actions the Fed takes will be modest and gradual. This indicates that it will move slowly to avoid stifling economic growth.
It remains to be seen how well these strategies will work. Inflation could remain at a high level, in which case the Fed may have to resort to more aggressive rate hikes. Alternatively, a sluggish global economy could lead to a decrease in inflationary pressures, allowing the Fed to take more measured action.
Either way, the Fed is making it clear that it will monitor economic data closely to ensure it continues to take the correct monetary policy decisions in the coming months.