The U.S. Federal Reserve is expected to keep interest rates unchanged on Wednesday, as policymakers monitor inflation and deliberate the timing of the first rate cut. The Federal Reserve has raised interest rates to a 23-year high of 5.25-5.50 percent as it aims to decrease inflation to its long-term target of two percent. Following a significant improvement in 2023 against rising prices, 2024 has proven more challenging.
Economic data
The U.S. saw a 0.10 percent increase in inflation in February to 3.20 percent. However, the unemployment rate has remained low at 3.9 percent, wage growth has eased, and economic growth for the final quarter of 2023 was better than expected. Those factors indicate that the U.S. economy is in good shape.
Despite the improvement in some areas, U.S. consumer and producer inflation in February was slightly worse than expected. This signals a slowing in the pace of disinflation the U.S. saw in 2023 which gives the Federal Reserve a reason for caution in their decision to cut interest rates.
Interest rate expectations
The implied probability of a rate cut in June has decreased, driven by factors such as disappointing inflation data and a robust U.S. job market. Traders are currently pricing a 67 percent chance of an interest rate cut in June. Initially, the futures market indicated a high likelihood of a 25-basis point rate cut at the upcoming meeting. However, this probability has diminished substantially in recent weeks, reflecting the Federal Reserve’s stance against early and extensive rate cuts.
The Federal Reserve, which kept its target rate unchanged in January, signaled that rates had reached their peak. The upcoming meeting on Wednesday will provide updated interest rate projections and forecasts for growth, inflation, and unemployment.
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Regional outlook
The Federal Reserve’s rate decision has implications beyond U.S. borders, particularly for regions like the Gulf Cooperation Council (GCC). The cost of borrowing for businesses and consumers in the GCC depends significantly on the Federal Reserve’s decisions as the local currencies are pegged to the U.S. dollar. Therefore, Fed decisions directly impact interest rates in the GCC region.
Despite rising borrowing costs in the UAE and Saudi Arabia, regional growth has remained relatively resilient, supported by public sector investment. However, lower interest rates could boost private sector investment and consumption in the medium term.
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