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Is The Fight Against Inflation Won By The Fed?

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Is The Fight Against Inflation Won By The Fed?

(CTN News) – The US Federal Reserve’s recent Inflation announcement to maintain its primary lending rate and anticipate three interest rate reductions in the upcoming year has instilled hope that the ongoing fight against has been successful.

As a result of this decision, the Dow Jones Industrial Average index experienced a significant surge, reaching an unprecedented peak, and the yields on US government bonds plummeted, leading to reduced borrowing expenses for various purposes such as car loans and home mortgages.

Given the current scenario of declining inflation, minimal unemployment rates, and consistent economic expansion, analysts are increasingly pondering whether the Federal Reserve has emerged victorious in its battle against inflation.

Federal Reserve’s achievements?

During the US economic recovery from the Covid-19 pandemic, supply shortages led to high inflation. In response to rising energy prices caused by Russia’s invasion of Ukraine in March 2022, the Federal Reserve aggressively raised interest rates to control inflation.

Over the next 18 months, the Fed gradually increased its lending rate, reducing consumer inflation from 9.1 percent to slightly above 3.1 percent by November 2023.

Currently, the economic outlook is positive, with low unemployment and no recession expected. The Fed aims for a “soft landing” and projects 2.6 percent economic growth this year, with a slowdown in 2024.

However, inflation remains above the Fed’s target of two percent, posing ongoing challenges.

What occurred during this week?

The Federal Reserve decided to keep interest rates unchanged and projected a decrease in rates for the upcoming year. Fed Chair Jerome Powell mentioned that the current interest rate may be at its peak for this economic cycle. While Powell’s comments were cautious, they were interpreted as a sign of confidence in the Fed’s ability to combat inflation.

KPMG Chief Economist Diane Swonk and Steve Englander of Standard Chartered Bank both noted that the Fed’s statement and projections were more dovish than expected.

What dangers still exist?

According to data from CME Group, the financial markets are increasingly confident that the Federal Reserve has finished raising interest rates and are now anticipating up to six rate cuts next year.

This outlook is more aggressive than the Fed’s projections and reflects a positive sentiment that the US economy has successfully addressed inflation concerns.

However, the Fed faces a significant risk as it transitions from a prolonged pause to implementing interest rate cuts – the potential return of inflation.

Any external shock, such as an escalation of conflicts in Ukraine or Gaza, could lead to a surge in food or energy prices, complicating the Fed’s efforts to effectively control and reduce the rate of price increases to the desired two percent target.

Federal Reserve Chairman Powell emphasized the uncertainty surrounding inflation and the challenges ahead during a press conference on Wednesday.

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