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Expert: Fed can afford to wait with interest rate cuts

USA's central bank, the Federal Reserve (Fed), is leaving the interest rate unchanged in the range of 5.25—5.50 per cent and is now indicating only one cut this year. However, the Fed has room to wait, according to expert Maria Landeborn at Danske Bank. What saves the situation is that they have added an extra cut next year instead, she says.

» Updated: 16 July 2024, 14:57

» Published: 12 June 2024

Expert: Fed can afford to wait with interest rate cuts
Photo: Lisa Arfwidson/SvD/TT

The USA's central bank, the Federal Reserve (Fed), is leaving the interest rate unchanged in the range of 5.25—5.50 per cent and is now only indicating one cut this year.

But the Fed can afford to wait, according to expert Maria Landeborn at Danske Bank.

The thing that saves the situation is that they have added an extra cut next year instead, she says.

The last time the interest rate path was updated, in March, they predicted three cuts under 2024.

The central bank is willing to keep the interest rate high "for as long as necessary", says Fed chief Jerome Powell at a press conference.

He notes that the American economy has made progress in recent years towards the inflation target of two per cent and a reduced unemployment rate. The progress made in recent months is, however, described as "modest". It is a more positive assessment than the Fed made on 1 May, when they noted "a lack of progress" – but Powell clarifies that more positive indicators are required.

We need to see more positive data to strengthen our confidence that inflation is moving steadily towards two per cent, says Powell.

Positive inflation figures

After a steady decline in inflation during the second half of last year, there was a setback with unexpectedly high figures during the first three months of this year. But earlier on Wednesday, figures showed that inflation in May eased for the second month in a row – today's most important news, according to Maria Landeborn, private economist and senior strategist at Danske Bank.

The reason for postponing the interest rate cuts is that the USA's economy is doing well, according to Landeborn.

There are still many new jobs being created, growth and the economy are good. That means there is no rush to cut interest rates, and the Fed can afford to wait for more signals that inflation is on its way down towards 2 per cent.

"Takes away the drama"

An extra interest rate cut has also been added to the forecast for next year – which means that the forecast for the interest rate for 2026 remains unchanged.

It takes away much of the drama surrounding the move from three to one interest rate cut, and that means the market reactions will not be particularly large, whether you look at the bond market or the stock market.

The Fed started raising interest rates in March 2022. The last time the central bank raised rates was in July last year, by 0.25 percentage points. Since then, several decisions have been made to keep the interest rate level unchanged.

The range of 5.25—5.50 is the highest level in 22 years.

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By TTThis article has been altered and translated by Sweden Herald

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