Recent upgrades in economic forecasts for the United States signal a wave of optimism about the country’s financial outlook. This has led to speculation that the Federal Reserve, America’s central banking system, might hold off on reducing interest rates until later in the year.
The interplay between economic growth and interest rates has a rich history. Traditionally, central banks, including the Federal Reserve, have used interest rate adjustments as a tool to curb inflation and encourage economic growth. In periods of strong economic performance, a cautious approach to lowering rates is often adopted to prevent the economy from overheating.
FIgure 1: 12-Month CPI Change and Federal Funds Rate Over Time
The latter part of the previous year brought unexpected economic resilience, with significant growth and a strong job market. These developments have prompted a revision of growth expectations for the current year, now predicted at a 2% increase in GDP.
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