WASHINGTON – The U.S. Federal Reserve kept interest rates on hold on Wednesday, again deciding not to cut as it continues to battle inflation that has gotten tougher lately.
In a widely expected move, the US central bank kept its key short-term lending rate in a target range of between 5.25%-5.50%. The federal funds rate has been at this level since July 2023, when the Fed last hiked and pushed the range to its highest level in more than two decades.
The rate-setting Federal Open Market Committee did vote to ease the pace at which it reduces the bonds on the central bank’s mammoth balance sheet, in what could be seen as a gradual easing of monetary policy.
In its decision to hold interest rates steady, the committee noted in its post-meeting statement a “lack of further progress” on returning inflation to the 2% target.
“The Committee does not expect it would be appropriate to lower the target range until it has greater confidence that inflation is moving steadily toward 2 percent,” the statement said, repeating language it used after the January and March meetings.
The statement also changed its characterization of progress toward the dual mandate of price stability and full employment. The new language compensates a bit, saying that the risks of achieving both “have moved toward better balance over the past year.” Earlier statements said risks were “coming into better balance.”
Beyond that, the statement was little changed, with economic growth characterized as moving at a “steady pace” amid “strong” job gains and “low” unemployment.
Chairman Jerome Powell during the press conference after the decision expanded on the idea that prices are still rising too quickly.
“Inflation is still very high,” he said. “Further progress in dismantling it is not assured and the way forward is uncertain.”
However, investors were pleased by Powell’s comment that the Fed’s next move was “unlikely” to be a rate hike. The Dow Jones industrial average jumped after the remarks, rising as much as 500 points. He also stressed the need for the committee to take its decisions “session by session”.
On the balance sheet, the committee said that starting in June it will slow the rate at which it will allow the proceeds of maturing bonds to flow out without reinvesting them.
“Quantitative Tightening”
In a program that began in June 2022 and is nicknamed “quantitative tightening,” the Fed allowed up to $95 billion a month in maturing bond and mortgage-backed securities proceeds to be separated each month. The process resulted in the central bank’s balance sheet shrinking to about $7.4 trillion, or $1.5 trillion less than its peak around mid-2022.
Under the new plan, the Fed would lower the monthly cap on Treasurys to $25 billion from $60 billion. That would put the annual reduction in holdings at $300 billion, compared to $720 billion since the program began in June 2022. The potential mortgage shift would remain unchanged at $25 billion a month, a level that has been hit only in rare cases.
The QT was a way the Fed used to tighten conditions after inflation rose, as it retreated from its role of ensuring the flow of liquidity through the financial system by buying and holding large amounts of Treasury and agency debt. Reducing the roll-off of the balance sheet, therefore, can be seen as a light easing measure.
The funds rate determines what banks charge each other for overnight lending, but it fuels many other consumer debt products. The Fed uses interest rates to control the flow of money, with the intention that higher interest rates will reduce demand and thus help lower prices.
But consumers continued to spend, increasing credit debt and reducing savings levels as stubbornly high prices eat into household finances. Powell has repeatedly cited the devastating effects of inflation, especially for people with lower incomes.
Off-peak prices
Although price increases are a long way from peaking in mid-2022, most data so far in 2024 have shown inflation holding well above the Fed’s 2% annual target. The main counter of the central bank shows Inflation is running at an annual rate of 2.7% – 2.8% when food and energy are excluded in the critical core measure the Fed focuses heavily on as a signal of longer-term trends.
At the same time, gross domestic product grew at a less-than-expected annual rate of 1.6 percent in the first quarter, raising concerns about stagflation with high inflation and slow growth.
More recently, the Labor Department’s employment cost index this week posted its biggest quarterly rise in a year, sending another jolt through financial markets.
As a result, traders had to reprice their interest rate expectations dramatically. Where the year began with markets pricing in at least six rate cuts that were supposed to begin in March, the outlook now is for just one, and likely none near the end of the year.
Fed officials have been almost unanimous in their calls for patience in easing monetary policy as they seek confirmation that inflation is comfortably back on target. One or two officials even hinted at the possibility of a rate hike if the data doesn’t cooperate. Atlanta Fed President Rafael Bostic was the first to say specifically that he expects only one rate cut this year, likely in the fourth quarter.
In March, FOMC members made three rate cuts this year, assuming quarterly percentage point intervals, and won’t have a chance to update that call until the June 11-12 meeting.
Correction: The Fed kept its key short-term lending rate in a target range of 5.25%-5.50%. A previous version provided the range incorrectly. The next Federal Reserve meeting is June 11-12. An earlier version misstated the date.