WASHINGTON (AP) — The Federal Reserve on Wednesday underscored that inflation has remained stubbornly high in recent months and said it doesn't plan to cut interest rates until it has “greater confidence” that price growth is sustainably slowing toward its 2 percent target.
The Fed announced the decision in a statement after its most recent meeting, leaving interest rates unchanged at about 5.3%, the highest level in two decades. Several recent better-than-expected reports on prices and economic growth have shaken the Fed's belief that inflation was steadily easing. The combination of high interest rates and persistent inflation has also emerged as a potential threat to President Joe Biden's reelection.
“In recent months, we have not made further progress toward our 2 percent objective,” Chairman Jerome Powell said at a news conference.
“Gaining greater confidence is likely to take longer than previously anticipated,” he added.
Powell sounded optimistic about inflation, saying that despite the recent setback, “we expect inflation to fall again over the course of the year.”
Wall Street traders initially welcomed expectations that the Fed would cut interest rates this year and comments from Chairman Powell that the central bank was not considering returning to raising rates to curb inflation.
“The next policy rate hike is unlikely,” he said.
However, stock prices later erased the gains and ended the day trading little changed from where they were before Chairman Powell's press conference.
Still, Powell outlined a range of scenarios for the coming months. If employment remains strong and “inflation remains steady,” he said, “it would be appropriate to postpone further rate cuts.”
But if inflation remains subdued or the unemployment rate unexpectedly rises, Powell said the Fed could cut interest rates, which would gradually make mortgages, auto loans and other borrowing costs lower for consumers and businesses.
The comments “signal a lot less confidence on the way policy will evolve over the course of the year,” said Jonathan Pingle, an economist at UBS. “We were all hoping for an update on the committee's future course, and instead we got, 'We're not really confident about what the future course will be, so we can't tell you.'”
The central bank's overarching message on Wednesday – that policymakers need more evidence that inflation is slowing to the Fed's target level before they start cutting rates – reflects an abrupt change of direction.Up until their last meeting on March 20, officials had forecast three rate cuts in 2024, likely starting in June.
However, given persistently high inflation, financial markets only expect a rate cut in November of this year, according to futures prices tracked by CME FedWatch.
The Fed's cautious outlook comes after three months of data that suggested persistent inflationary pressures and robust consumer spending: Inflation has fallen to 2.7% from a peak of 7.1%, the Fed's preferred measure, as supply chains have eased and the price of some goods has actually fallen.
But average prices remain well above pre-pandemic levels, and the costs of a wide range of services, from apartment rent to health care, restaurant meals, and car insurance, continue to rise. With less than six months until the presidential election, many Americans are expressing frustration with the economy, especially the pace of price increases.
The Fed said on Wednesday it would slow the pace of unwinding one of its largest policies of the coronavirus pandemic: buying trillions of dollars of Treasury and mortgage-backed bonds to stabilize financial markets and keep long-term interest rates low.
The Fed is currently allowing $95 billion of those bonds to be redeemed each month but is not buying them back. Its holdings have fallen to about $7.4 trillion from $8.9 trillion in June 2022, when it began reducing them. The Fed said Wednesday it would reduce its holdings at a more gradual pace in June.
Instead of allowing $60 billion in Treasury maturities per month, the government will only allow $25 billion, while continuing to allow $35 billion in mortgage-backed bond maturities per month.
By reducing its bond holdings, the Fed could help keep longer-term interest rates, including mortgage rates, higher than they would otherwise be because reducing its bond holdings would force other buyers to replace it, potentially pushing up interest rates to attract the necessary buyers.
The U.S. economy is currently in better shape than most economists expected, and hiring is strong. The unemployment rate has been below 4% for more than two years, the longest streak since the 1960s. Though the economy grew at just a 1.6% annual rate in the first three months of the year, consumer spending has been growing at a strong pace, a sign the economy will continue to expand.
He also downplayed concerns that the economy was in danger of slipping into “stagflation” – the damaging combination of slow growth, high unemployment and soaring inflation that plagued the United States in the 1970s.
“I lived through stagflation,” Powell said. “We had 10 percent unemployment, high single-digit inflation, and very slow growth. Today, we have 3 percent growth, which is pretty strong growth by any measure, and inflation below 3 percent. … I don't really see 'stagflation' or 'inflation.'”