The Federal Reserve decided to keep interest rates unchanged on Wednesday, prolonging its aggressive fight against inflation even though the latest data released hours earlier showed price growth had slowed slightly.
Price growth slowed last month, but inflation progress has remained gradual since late last year, according to data from the Bureau of Labor Statistics. Meanwhile, the central bank said Wednesday it expects inflation to remain higher for longer than previously expected.
The Fed reversed its previous forecast of three rate cuts this year and said it now expects one cut in 2024 instead.
“The Committee believes that it would not be appropriate to lower the target range until it has greater confidence that inflation is moving sustainably toward 2 percent,” the Federal Open Market Committee, the Fed's interest rate-setting body, said in a statement.
At a press conference in Washington, DC on Wednesday, Fed Chairman Jerome Powell praised the latest inflation data but said the central bank needs to see further progress before cutting interest rates.
“We welcome today's data and look forward to seeing more like it,” Powell said. “We will need better data to have greater confidence that inflation is declining sustainably to 2 percent.”
For the seventh consecutive meeting over nearly a year, the Fed has chosen to keep interest rates unchanged in response to rising inflation and strong economic conditions.
In theory, prolonged high interest rates should stifle economic activity, reduce consumer demand and lower prices, but a resilient economy and persistent inflation have largely defy the Fed's efforts.
While inflation has fallen significantly from a peak of 9.1%, price increases have been little changed in recent months and remain more than a percentage point above the Fed's 2% target rate.
The Federal Reserve has largely abandoned its earlier expectations of three interest rate cuts by the end of the year.
Some observers expect the Fed to refrain from cutting interest rates for the remainder of 2024.
In a statement to ABC News before the rate announcement, Vanguard Investment Group chief economist Roger Arriaga-Diaz said he was confident the Fed would keep interest rates at current levels for at least the next six months.
Arriaga Diaz added that the forecast was due to “insufficient progress in fighting inflation and continued growth and labor momentum.”
In a note to clients, Deutsche Bank reiterated its skepticism about any near-term rate cuts. “Fed officials have made it clear they are taking a wait-and-see approach regarding the timing and size of any rate cuts,” the note said.
Strong economic activity, combined with rising consumer demand, could lead to faster price increases, so there is a risk that inflation could rise again if the Fed cuts interest rates too quickly.
But if interest rates remain high for an extended period of time, it could put downward pressure on economic growth and tip the United States into recession.
Apples are displayed at a grocery store in San Anselmo, California on June 11, 2024. Justin Sullivan/Getty Images
The jobs report released Friday beat economists' expectations and signaled a resilient economy. The Bureau of Labor Statistics said large job gains in May surpassed the average monthly increase from a year ago.
Average hourly wages rose 4.1% in the 12 months to May, according to the report, a rate that outpaces inflation, suggesting workers have more purchasing power even as prices rise.
While the data would be a boon for workers, policymakers may be hesitant to approve it, fearing higher wages could prompt companies to raise prices to cover higher labor costs.
Economic output slowed significantly at the start of 2024 but continued to grow at a solid pace.
While the Federal Reserve has resisted lowering interest rates, consumers have faced higher borrowing costs for everything from mortgages to credit cards.
The average interest rate on a 30-year fixed mortgage is 6.99%, according to Freddie Mac data released last week.
When the Fed implemented the first of its current series of rate hikes in March 2022, the average interest rate on a 30-year fixed mortgage was just 3.85%, according to data from Freddie Mac.