WASHINGTON — The Federal Reserve sent a cool signal Wednesday that it is done raising interest rates but signaled it is not ready to start cutting them.
In a significantly revised statement that ended the central bank’s two-day meeting this week, the Federal Open Market Committee removed language that indicated a willingness to continue raising interest rates until inflation is under control and approaches level 2. Fed. Inflation target in %.
However, he also said he has no plans to cut rates for now as inflation is still above the central bank’s target. The statement also provides limited indication that this has been done and only outlines the factors that will go into the policy “adjustment.”
“The committee does not expect that it will be appropriate to reduce the target range until it has greater confidence that inflation is sustainably approaching 2 percent,” it said in a statement.
During Fed Chairman Jerome Powell’s press conference, he said policymakers are waiting for more data to confirm trends are continuing. He also noted that a March rate cut is unlikely.
“I don’t think the committee will reach a certain level of confidence by the March meeting,” Powell said.
“We want to see more good data. It’s not that we’re looking for better data, we’re looking for a continuation of the good data we’ve seen,” he added.
Markets initially took the news calmly but retreated after Powell’s comments questioning the March rate cut. The Dow Jones Industrial Average fell more than 300 points during the session and Treasury yields fell. Futures prices also fluctuated, with the market pricing in about a 64% chance that the Fed will stay at its March 19-20 meeting, according to CME Group calculations.
While the committee’s statement does outline the factors policymakers will consider when evaluating policies, it does not rule out an outright rate increase. One notable change was the exclusion of the delayed effects of monetary policy from consideration. Officials generally estimate it will take at least 12 to 18 months for the changes to take effect; The Fed last raised rates in July 2023 after beginning its tightening cycle in March 2022.
“In considering any adjustments to the target range for the federal funds rate, the committee will carefully evaluate incoming data, evolving prospects, and the balance of risks,” the statement said. These formulations replaced a variety of factors, including “cumulative monetary tightening, the lags with which monetary policy affects economic activity and inflation, and economic and financial events.”
“Moving towards better balance”
The changes were part of an overhaul in which the Fed seeks to chart a course for a future in which inflation falls and economic growth is sustained. The statement said economic growth was “robust” and noted progress made in the area of inflation.
“The Committee believes that the risks to employment and inflation targets are becoming more balanced,” the FOMC said. “The economic outlook is uncertain and the committee remains very sensitive to inflation risks.”
A key clause missing from the statement was the “extent of any additional policy strengthening” that might occur. Some Fed watchers sought words to emphasize that additional rate hikes were unlikely, but the statement left the question at least somewhat open.
Before the meeting, markets had expected the Fed could begin cutting its benchmark overnight borrowing rate as early as March, with May also being a possible starting point. Immediately after the decision, shares fell to session lows.
Policymakers, however, were more cautious in their intentions, cautioning that they did not see the need to act quickly as they watched the data evolve. In December, committee members flagged the likelihood of three quarter-percentage point rate cuts this year, less ambitious than the six estimated in futures markets, according to CME Group.
Moreover, the committee voted unanimously for the fourth time in a row not to raise the federal funds rate. The key rate is set in the range of 5.25%-5.5%, which is the highest in almost 23 years.
The Fed is riding a wave of slowing inflation, a strong labor market and strong economic growth, giving it both leeway to begin easing monetary policy and caution about growth that could pick up again and send prices higher again. Along with 11 rate hikes, the Fed also allowed its bond holdings to shrink, reducing the central bank’s balance sheet by more than $1.2 trillion. The statement indicated that the balance sheet reduction will continue at a rapid pace.
The “soft landing” narrative
Many economists now subscribe to the concept of a soft landing, in which the Fed can reduce inflation without undermining economic growth.
Separate reports Wednesday showed the labor market was softening, but so were wages. Payroll processing company ADP said private companies added just 107,000 new workers in January, below market expectations but still indicating an expanding labor market. Additionally, the Labor Department reported that the cost of employment index, a measure the Fed closely monitors for inflation signals through wages, rose just 0.9% in the fourth quarter, the smallest increase since the second quarter of 2021.
More broadly, inflation, as measured by core prices of personal consumption spending, rose 2.9% in December from a year earlier, the lowest since March 2021. On a six- and three-month basis, benchmark PCE prices were at or below the Fed’s target.
Separately, the Fed also announced it was changing its investment policies for both senior officials and employees. The changes expand the scope to include anyone with access to “confidential FOMC information” and say some employees may be required to produce brokerage statements or other documents to verify the accuracy of the information disclosed.
The changes follow controversy over several Fed officials trading from private accounts as the central bank made major policy changes in the early days of the Covid pandemic.
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