The Federal Reserve decided on Wednesday to keep interest rates on hold, postponing a highly anticipated rate cut, as rising inflation continues to put a strain on American households.
The announcement came days after new government data showed the economy was cooling.
The slowdown comes amid months of persistent inflation, putting pressure on the Fed to keep interest rates high despite the risk that high borrowing costs could cripple economic activity.
“The economic outlook remains uncertain and the Committee continues to pay close attention to inflation risks,” the Federal Open Market Committee, the Fed's interest rate-setting body, said in a statement Wednesday.
Given the lack of recent progress in containing inflation, the FOMC said it does not plan to lower interest rates until it remains confident that inflation is declining sustainably.
“So far, the data do not give us a lot of confidence,” Fed Chairman Jerome Powell said at a news conference Wednesday in Washington, D.C. “It will likely take longer to get that confidence than previously anticipated.”
Ahead of the Fed's decision, some observers had said the Fed could raise interest rates within months before moving forward with further cuts. Powell downplayed the possibility of such a move in his comments on Wednesday.
“The next rate hike appears unlikely,” Powell said.
At its last meeting in March, the Fed opted to keep interest rates on hold for a fifth consecutive session but stuck to its outlook for three rate cuts by the end of 2024.
The approach amounts to an extended pause on the aggressive rate-hiking cycle that began about two years ago as the central bank sought to rein in rapid inflation.
Inflation has fallen significantly from a peak of 9.1%, but is still more than a percentage point above the Fed's 2% target rate.
Lowering interest rates would lower borrowing costs for consumers and businesses and could spark a burst of economic activity through increased household spending and business investment.
However, there is a risk that inflation could rise again if the Fed cuts interest rates too quickly, as strong economic activity and rising consumer demand could lead to faster price increases.
Meanwhile, the recent economic slowdown could complicate the Fed's stance.
The U.S. economy slowed significantly at the start of 2024 but continues to grow at a solid pace, according to data released last week by the Commerce Department.
The Commerce Department said this week that gross domestic product, a measure of all goods and services produced in the economy, grew at an annualized rate of 1.6% in the first three months of the year.
The figure was well below expectations and marked a sharp slowdown from the 3.4 percent annualized rate in the fourth quarter of last year.
Cheese products are displayed at a grocery store in New Orleans on April 17, 2024. Gerald Herbert/AP
In March, before the release of the latest GDP data, Powell said the combination of rising inflation and a strong economy gave the Fed an opportunity to keep interest rates at very high levels because there was little imminent risk of the Fed causing a recession.
“On inflation, it's too early to tell whether the recent numbers indicate anything more than a simple uptick,” Powell said at a business conference at Stanford University.
“Given the strength of the economy to date and the evolution of inflation, we have time to make policy decisions based on upcoming data,” Powell added.
Economists who spoke to ABC News recently downplayed the alarm generated by last week's GDP release, saying robust consumer spending continues to drive steady growth.
But they added that the Fed could find itself in a difficult position if a gradual economic slowdown continues alongside rising inflation, a trend that could force the Fed to keep interest rates high even as the economy weakens.
The federal funds rate is hovering between 5.25% and 5.5%, its highest level since 2001.