The American central bank, the Federal Reserve (US Fed), has taken a tough decision this time too not to make any changes in its interest rates. Interestingly, US President Donald Trump was continuously pressurizing to cut the rates, but considering the current global situation, the Fed thought it better to be cautious. The biggest reason behind this decision is the ongoing war in Iran, weakening demand for jobs and continuously rising inflation.
Ignoring Trump’s appeal, what rate does the Fed stand on?
At present, the US Federal Reserve has kept its key interest rates stable in the range of 3.50 percent to 3.75 percent. This was not a unilateral decision, rather it was passed with an overwhelming majority of 11-1 in the policy-making committee. Only one member of the committee, Stephen Miron, supported cutting interest rates. All the other members were seen standing in favor of maintaining ‘status-co’ i.e. the old status quo. However, a small ray of hope for the market and the common man is that the Fed has definitely given a slight hint of at least one cut in rates by the end of this year. But this will completely depend on how the economy turns out in the coming months.
Economy in the shadow of war, Powell gave direct warning
The things Federal Reserve Chairman Jerome Powell said in his press conference present a worrying picture of the global economy. He clearly said that due to the ongoing war between America and Iran, inflation may once again go out of control. Powell’s direct message was that unless there is a substantial decline in inflation, the question of cutting interest rates does not arise. He believes that it is too early to assess how serious this war will be on the American and global economy. However, he also clarified that it would not be correct to say that the economy is stuck in “stagflation” (combination of inflation and economic slowdown).
rising inflation graph
In view of the fear of supply chain disruption and price rise due to the Iran war, the US Central Bank has also increased future inflation estimates. According to the Fed’s ‘Summary of Economic Projections’ report, by the end of 2026 the PCE inflation rate is expected to reach 2.7 percent instead of 2.4 percent. Along with this, core inflation (which excludes volatile prices like food items and fuel) is also expected to rise to 2.7 per cent from the earlier estimate of 2.5 per cent. This situation becomes more serious when we see that the Fed’s long-term inflation target is only 2 percent.