Federal Reserve’s Stance on Interest Rates and Economic Outlook

The Federal Reserve chose to keep interest rates unchanged in its recent decision, with Fed Chair Jerome Powell addressing speculation that the central bank might consider rate cuts in March. Powell aimed to shift the narrative, emphasising that positive economic data is a welcome development for the central bank. He sought to dispel the notion that a period of “bad news being good news” would be necessary for the Fed to pursue lower interest rates this year.

Powell expressed a positive outlook on stronger economic growth and a robust labor market, stating, “We look at stronger growth, we don’t look at it as a problem.” He clarified that the Fed is not seeking a weaker labor market but rather aims for inflation to continue its downward trend.

Recent economic indicators revealed a 3.3% annualised growth in the fourth quarter of 2023, and the unemployment rate stood at 3.7% in December. Core PCE, the Fed’s preferred inflation measure, showed an annual increase of 2.9% in December, below the 2% target. Powell highlighted the need for “greater progress” on inflation before considering rate cuts, indicating a preference for time over magnitude.

Despite emphasising that a rate cut in March is “probably not” the most likely outcome, Powell suggested that interest rates have likely reached their peak for the current cycle. The Fed’s earlier expectations in December 2022 foresaw economic challenges, including a forecasted GDP expansion of just 0.5% and an expected rise in the unemployment rate to 4.6%.

Acknowledging the costs of its actions, Powell pointed out the peak inflation of 9.1% in June 2022 and negative real wage growth for a two-year period from April 2021 to April 2023. The bear market in 2022 posed challenges for investors. Despite these costs, Powell aims to challenge the perception that continued economic expansion should be feared in 2024. Whether this perspective gains trust among investors and the public remains uncertain.