WASHINGTON – The Federal Reserve maintained its stance on interest rates on Wednesday, again deciding not to cut interest rates as it continues its fight against inflation, which has become more challenging of late.
The US central bank was widely expected to keep its short-term borrowing rate within a target range of 5.25%-5.50%. The federal funds rate has been at this level since July 2023, when the Fed last raised it and brought the range to its highest level in more than two decades.
The Federal Open Market Committee, which sets rates, voted to ease the pace of drawdown of bond holdings on the central bank’s huge balance sheet, in what could be seen as a gradual easing of monetary policy.
Having decided to keep rates level, the committee said in a statement after the meeting that there was “no further progress” in reducing inflation to its 2% target.
“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, repeating language it has used since its January and March meetings.
The statement also changed the characterization of progress toward a dual mandate: stable prices and full employment. The new language hedges a bit, saying that the risks of achieving both “have shifted toward a better balance over the past year.” Previous statements said the risks were “coming into better balance.”
Beyond that, little has changed in the statement, describing economic growth as moving at a “solid pace” amid “strong” job growth and “low” unemployment.
Chairman Jerome Powell, during a press conference after the decision, elaborated on the idea that prices are still rising too quickly.
“Inflation is still too high,” he said. “Further progress in eliminating it is not guaranteed and the path forward is uncertain.”
However, investors were encouraged by Powell’s comment that the Fed’s next move was “unlikely” to raise rates. The Dow Jones Industrial Average jumped after the remarks, rising as much as 500 points. He also emphasized the need for the committee to make its decisions “meeting by meeting.”
On the balance sheet, the committee said that starting in June it would slow the rate at which it allows yields on maturing bonds to roll off without reinvesting them.
“Quantitative tightening”
Under the program, which began in June 2022 and was called “quantitative tightening,” the Fed allowed the Fed to dump up to $95 billion a month in proceeds from maturing Treasuries and mortgage-backed securities. That process has caused the central bank’s balance sheet to shrink to about $7.4 trillion, down $1.5 trillion from its peak around mid-2022.
Under the new plan, the Fed will lower its monthly limit on Treasury bonds from $60 billion to $25 billion. This would result in an annual reduction in assets of $300 billion, down from $720 billion since the program began in June 2022. .
QT was one way the Fed tightened conditions after inflation soared as it abandoned its role of keeping liquidity flowing through the financial system by buying and holding large amounts of Treasury and agency debt. Thus, reducing the balance sheet decline can be seen as a small mitigation measure.
The funds rate determines the amount banks charge each other for overnight lending, but is also factored into many other consumer debt products. The Fed uses interest rates to control money flows with the intention that higher rates will dampen demand and thus help lower prices.
But consumers continue to spend, increasing debt and lower savings rates as persistently high prices eat into household finances. Powell repeatedly cited the harmful effects of inflation, especially on low-income people.
Prices below peak levels
While rising prices are far from their peak in mid-2022, most data through 2024 show inflation holding well above the Fed’s annual 2% target. The central bank’s main gauge shows inflation running at 2.7% annually – 2.8% if you exclude food and energy from the all-important headline measure the Fed particularly focuses on as a signal of longer-term trends.
At the same time, gross domestic product grew at a slower-than-expected 1.6% annual rate in the first quarter, raising concerns about the possibility of stagflation with high inflation and slow growth.
Most recently, the Labor Department’s Employment Cost Index posted its biggest quarterly gain in a year this week, sending another jolt through financial markets.
Consequently, traders had to sharply re-evaluate their expectations for rates. While the year began with markets pricing in at least six interest rate cuts due to begin in March, only one is now forecast, and likely won’t come until the end of the year.
Fed officials have shown near unanimity in their calls for patience in easing monetary policy as they seek confirmation that inflation is firmly back on target. One or two officials even mentioned the possibility of raising rates if the data doesn’t add up. Atlanta Fed President Raphael Bostic was the first to specifically say he expects only one rate cut this year, likely in the fourth quarter.
In March, FOMC members outlined three rate cuts this year at quarter-percentage-point intervals and won’t have a chance to update the proposal until their June 11-12 meeting.
Correction: The Federal Reserve kept its short-term borrowing rate target within a target range of 5.25%-5.50%. In an earlier version, the range was specified incorrectly. The next Fed meeting will take place on June 11-12. An earlier version had the date incorrect.