On June 12, the Federal Open Market Committee (FOMC) held a meeting that drew significant attention from investors worldwide, particularly on the interest rate movement. The Federal Reserve (Fed) has held interest rates steady at their current range of 5.25% to 5.5% and revised its outlook for rate cuts to just one in 2024.
Federal Reserve Chair Jerome Powell stated at the press conference that the central bank still needs to be more confident in lower rates despite inflation having decreased from its peak levels. In this article, we will explore the factors influencing the Fed’s decision towards interest rates and examine the potential impacts of rate cuts on the U.S. and regional markets (Singapore and Malaysia).
How does the Fed determine interest rates?
The Fed does not directly control the interest rates but aims to influence the borrowing costs throughout the economy by adjusting the federal funds rate. This rate is the target interest rate banks lend to each other overnight. The benchmark rate helps determine consumer loans, mortgages, and corporate borrowing rates.
In deciding the potential rate moves, the Fed considers serval factors including but not limited to the following:
Economic indicators: The Fed closely monitors various economic data, such as GDP growth, unemployment rates, Consumer Price Index (CPI), nonfarm payroll, and monthly job creation. May’s headline CPI was 3.3% year-over-year and is 0.1% lower than the officials’ economic forecasts. Inflation targets: The Fed aims for a 2% inflation rate and adjusts interest rates to keep inflation within this target range. Global economic conditions: International events and economic conditions can influence the Fed’s decisions, particularly if they impact the U.S. economy. For example, in response to the financial fallout from the COVID-19 pandemic, the Fed announced an emergency rate cut in March 2020, lowering interest rates to
