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Fed Signals: Mixed Message on Rates, Clear Rejection of Digital Dollar

Last Updated March 21, 2024 11:42 AM
Teuta Franjkovic
Last Updated March 21, 2024 11:42 AM
By Teuta Franjkovic
Verified by Peter Henn

Key Takeaways

  • The Federal Reserve expects to cut interest rates three times this year, aiming to boost the economy.
  • Despite keeping rates steady now, the Fed might need to raise them in 2025 if inflation stays high.
  •  Fed Chair Jerome Powell clarified they’re not secretly creating a digital currency.

On Wednesday, United States Federal Reserve officials said they would reduce the key interest rate  three times in 2024, despite unexpected signs of high inflation at the beginning of the year.

However, they anticipate a smaller number of rate cuts in 2025 and have marginally increased their inflation projections.

Fed Holds Rates, Signals Potential Future Hikes as Inflation Persists

Following their most recent meeting, the officials kept their benchmark interest rate steady  for the fifth consecutive time.

In the latest quarterly projections , policymakers anticipated both stronger economic growth and inflation exceeding their 2% target would continue into the next year. Consequently, interest rates might need to stay marginally elevated for a longer period.

Chair Jerome Powell remarked  that inflation has significantly reduced from its peak levels. However, he also pointed out that inflation remains excessively high, there is no guarantee of continued progress in reducing it, and the future course is still being determined.

Powell stated :

“The risks are really two-sided here. We’re in a situation where if we ease too much or too soon, we could see inflation come back. And if we ease too late, we could see unnecessary harm to employment.”

Fed Chair Denies Secret CBDC Development Despite Ongoing Research

Following the announcement, Powell assured reporters the bank was not secretly developing a central bank digital currency (CBDC).

He said :

“It’s wrong to say that we’re working on a CBDC and that we’ve secretly got a lab here, where we’ve got one, and we’re just gonna spring it on Congress at the right moment. We don’t. I haven’t at all, in my own mind, made a decision that I think this is something the US should be doing.”

Powell reiterated statements similar to those he has made to government officials recently. Earlier in the month, he told the Senate Banking Committee the central bank was “nowhere near” either recommending or implementing a CBDC

Nonetheless, the Fed Chair emphasized  his team was actively exploring topics related to a CBDC and digital payments.

He added :

“What we are doing, and I think what every major central bank is doing, we’re trying to stay in the frontiers of what’s going on in digital finance. These issues have become very front burner in the last five or six years.”

Interest Rate Cuts to Lower Loan Costs and Bolster Biden’s Re-Election

Over time, reductions in interest rates  could result in decreased expenses for mortgages, car loans, credit card debt, and business financing. Such adjustments might also support President Joe Biden’s re-election efforts, currently challenged by widespread dissatisfaction with rising prices, by providing an economic boost through reduced borrowing costs.

On Wall Street, the decision by the Federal Reserve to maintain its forecast of three rate cuts for the year led to a significant increase in stock prices  on Wednesday.

This surge was partly due to relief among traders, who had been concerned the Fed might reduce the number of rate cuts for 2024. Additionally, investors were likely reassured by Powell’s lack of alarm over unexpected signs of high inflation.

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