The Federal Open Market Committee (FOMC) has decided to keep the federal funds target range unchanged at 4.25% - 4.50%, in a move that analysts had largely anticipated. This decision comes after a strong overall performance from the US economy, which the FOMC acknowledged has made significant strides toward its goals over the past two years.
Chair Jerome Powell noted that labour market conditions remain robust and that inflation is moving closer to the long-desired 2% target, although it still registers at elevated levels.
Investec economist, Annabel Bishop said that the committee's steadiness in monetary policy reflects a positive sentiment in the financial markets.
"Following the announcement, risk aversion diminished, and the US dollar began to lose ground, reaching five-month lows against other currencies as confidence surged. In particular, the South African rand benefitted from this shift, rising from R18.21/USD prior to the meeting's outcome to R18.09/USD shortly thereafter—a clear indicator of improved market conditions. One of the noteworthy aspects of the FOMC's latest statement was the downgrade in its inflation forecast. The core Personal Consumption Expenditures (PCE) price index prediction has been reduced from 2.8% to 2.5% year-on-year for this year. This adjustment is seen as a relief to investors, fostering an environment where hopes for interest rate cuts in the US in 2025 and 2026 have increased, particularly in light of previously mounting fears regarding inflationary pressures that could hinder monetary easing," Bishop said.
The tone of the committee has shifted from a slightly hawkish stance to a more neutral one, a reflection of recent data indicating that the labor market is no longer a driver of significant inflationary pressure.
According to the FOMC statement, "A wide set of indicators suggests that conditions in the labour market are broadly in balance," supporting a decision to maintain the policy interest rate.
Despite optimistic labour market signs, the FOMC did revise its GDP growth expectations downwards. The projection, previously just above 2.0% y/y, has been adjusted to 1.7% y/y, a drop attributed to tightening fiscal policy and uncertainties stemming from US trade dynamics, including rising tariffs and targeted protectionism across various industries.
This period of adjustment hints at a moderation in consumer spending following the rapid growth seen over the latter half of 2024, amidst consumer and business surveys highlighting increased uncertainty about the economic outlook.
The implications of the FOMC's decisions extend beyond the US borders. Today’s South African Monetary Policy Committee (MPC) meeting is likely to echo the FOMC's approach by pausing interest rate changes after a series of rate cuts that began in September of last year. The MPC is also navigating concerns over the inflation outlook, particularly regarding future economic conditions over the next twelve to eighteen months.
BUSINESS REPORT