Federal Reserve Chairman Jerome Powell and his colleagues voted Wednesday to keep interest rates at their highest in 23 years as the central bank tries to tame stubborn inflation. Justin Sullivan/Getty Images Hide caption
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The Federal Reserve on Wednesday decided to keep interest rates at their highest in 23 years as it tries to tame stubborn inflation, and investors now believe it will be September at the earliest before borrowing costs start to fall.
“Inflation has moderated over the past year but remains elevated,” the Fed's interest rate setting committee said in a statement. “In recent months, we have not made further progress toward the Committee's 2 percent inflation objective.”
According to the Commerce Department's inflation gauge, which is closely watched by the Federal Reserve, consumer prices rose 2.7% in March from a year earlier.
Federal Reserve Chairman Jerome Powell said it is unlikely the central bank will need to raise interest rates further to tame inflation.
“My expectation is that inflation will decline over the course of this year,” Powell told reporters on Wednesday. “I'm less confident about that than I was before.”
The central bank has kept interest rates steady at 5.25% to 5.5% since July last year. In March, Fed policymakers thought they could cut rates by an average of 0.75% this year, but hopes of a rate cut have faded as inflation growth appears to be stalling.
While the prices of many goods, such as cars and furniture, have fallen, the prices of services, such as restaurant meals and car repairs, have continued to rise. Rising interest rates may have a smaller effect on demand for services, making it harder for the Fed to keep prices in check.
“People typically take out loans to buy big purchases like a car or a home,” said Ernie Tedeschi, economics director at the Yale Budget Institute. “Service spending is generally less sensitive to interest rates.”
A Commerce Department report last week said consumer spending is increasingly tilted toward services.
Additionally, tens of millions of Americans have low-interest fixed-rate mortgages and little credit card debt, so they are largely unaffected by the Fed's interest rate hikes.
“That's one of the reasons why consumers remain willing to go out to restaurants and shopping malls,” said Oren Krachikin, financial markets economist at Nationwide. “They're not feeling the pain of a high-interest rate environment. Of course, that means inflation won't fall as quickly, but that's kind of the trade-off we're facing right now.”
Powell rejected claims by some Republican lawmakers that the current situation is a repeat of the 1970s “stagflation” that saw slowing growth and high inflation.
“I don't see the stag or the inflation,” Powell said.