Federal Reserve announced on Wednesday that it would leave its short-term interest rate target unchanged at 5.25 percent to 5.5 percent. The decision was expected as stated by the Federal Reserve that "That the Fed would remain on hold was considered a near certainty in the weeks leading up to the meeting." The broader economic conversation has shifted, with concerns rising about economic growth and inflation not slowing as much as anticipated.
The first quarter real GDP growth came in at 1.6 percent SAAR, below expectations. However, as highlighted by the Federal Reserve, "Real final sales to private domestic purchasers, a measure of consumer and business spending, advanced at a healthy 3.1 percent SAAR." Meanwhile, inflation remains a concern with the year-over-year change in the price index for core personal spending standing at 2.8 percent in March.
According to The Wall Street Journal’s Economic Forecasting Survey, economists anticipate stronger economic and employment growth, along with higher inflation and interest rates. Despite the challenges, the baseline scenario suggests that the economy will avoid a recession in the next twelve months.
Looking ahead, Fed Chair Jerome Powell indicated that the next interest rate move is unlikely to be up, raising questions about potential cuts. While there were expectations for cuts in the latter part of the year, recent developments have led to a more cautious approach. The CME FedWatch Tool shows that financial markets are not pricing in lower rates before September.
The economic landscape is facing growing pressures as highlighted by concerns raised by gmcgurn@afsamail.org, stating that "The stresses are clearly building." The risk of downside scenarios, including stagflation or a boom-bust cycle, is on the rise, posing challenges to the baseline economic forecast.
In conclusion, the economic outlook remains uncertain as various factors come into play, influencing decisions on interest rates and economic growth.