Fed stands pat on rates as it remains wary of inflation

Washington — The US Federal Reserve held interest rates steady on Wednesday and signalled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.

Indeed, Fed chair Jerome Powell said it was likely to take longer than previously expected for Fed officials to gain the “greater confidence” needed for them to kick off interest rate cuts.

The Fed’s latest policy statement, issued at the end of a two-day meeting, kept key elements of its economic assessment and policy guidance intact, noting that “inflation has eased” over the past year, and framing its discussion of interest rates around the conditions under which borrowing costs can be lowered.

US stocks pared losses after the release of the policy statement while the US dollar fell against a basket of currencies. US Treasury yields fell.

Investors in contracts tied to the Fed’s policy rate continued to see the US central bank beginning to cut rates in November and added to bets that it will deliver at least one reduction in borrowing costs this year.

“The [Federal open market committee] does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%,” the Fed repeated in a unanimously approved statement that still indicated the next move on rates will be down.

“Inflation is still too high,” Powell said in a press conference after the meeting. “Further progress in bring it down is not assured and the path forward is uncertain.

“It is likely that gaining greater confidence will take longer than previously expected,” Powell said.

Progress lacks

That continues to leave the timing of any rate cut in doubt, and Fed officials made emphatic their concern that the first months of 2024 have done little to build the confidence they seek in falling inflation.

“In recent months, there has been a lack of further progress towards the committee’s 2% inflation objective,” the Fed said in its statement.

Where the prior statement in March suggested an improving dynamic, saying that the risks to the economy “are moving into better balance”, the new statement hinted that the process may have stalled with its assessment that risks “have moved towards better balance over the past year”.

“The committee marked to market on inflation by noting that [first quarter] data didn’t show the additional progress that they hoped to see, but the statement also suggested that they would not view further labour market strength through an inflationary lens,” said Omair Sharif, president of Inflation Insights.

The US central bank also announced it would scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25bn in Treasury bonds to run off each month vs the current $60bn. Mortgage-backed securities will continue to run off by up to $35bn monthly.

The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed’s last round of “quantitative tightening”.

While the move could loosen financial conditions at the margin while the US central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.

The benchmark policy rate has been held in the current 5.25%-5.50% range since July. Rate cuts had been anticipated as early as March, but have been pushed back as incoming inflation data showed that progress towards the 2% target had stalled. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, increased 2.7% in March on a year-over-year basis.

“Inflation remains elevated,” the Fed’s policy statement reads, repeating a phrase that many analysts feel will likely need to be removed as a precursor to an initial rate reduction.

The statement maintained its overall assessment of economic growth, saying that the economy “continued to expand at a solid pace. Job gains have remained strong and the unemployment rate has remained low”.

Reuters