The Federal Reserve has decided to maintain interest rates at their current levels in light of unexpectedly high inflation data, postponing any potential rate cuts. Officials have kept the benchmark lending rate at a 23-year high since July, as they continue to monitor inflation levels to ensure they are under control before considering lowering borrowing costs. The latest figures indicate a lack of progress in this regard, prompting the Fed to keep rates unchanged.
Chair Jerome Powell stressed during a news conference that policymakers believe interest rates are already restrictive enough, suggesting that it is unlikely the central bank will raise rates again in this cycle. However, the Fed announced plans to slow the pace of shrinking its balance sheet, a tool used to either stimulate or slow the economy. Starting in June, up to $25 billion in Treasuries from the portfolio will be allowed to mature each month without replacement, down from the current $60 billion.
Despite disappointing inflation figures, Powell emphasized that it is unlikely the next policy rate move will be a hike, pointing out that convincing evidence would be needed to show the policy stance is not restrictive enough to bring inflation down to the desired 2%. The job market remains strong with unemployment below 4%, and the economy continues to grow steadily. Powell suggested various scenarios that could lead to rate cuts, including a strong economy coupled with stalling inflation.
Economists anticipate a cooling of inflation and the economy in the second half of the year, with high interest rates, dwindling pandemic savings, and persistent inflation affecting household budgets. The Fed’s aggressive rate-hiking campaign has already impacted sectors like housing and business deals, with mortgage rates soaring and home sales dropping. Despite the challenges, the broader economy expanded significantly in 2023, driven by strong household spending and a robust job market.
Wall Street analysts project the timing of the first rate cut to be pushed back, with estimates ranging from July to December. The bar for another rate hike is seen as high, and the Fed is closely monitoring private data on declining rents as an indicator of potential future inflation. Powell denied concerns of stagflation and emphasized that the Fed is focused on ensuring a balanced approach to monetary policy to support the economy while taming inflation. Overall, the outlook suggests a cautious approach to any future rate adjustments in response to economic conditions.