The Fed holds rates at 5.3%, citing persistent high inflation and uncertainty in economic forecasts
The Federal Reserve has announced on Wednesday that inflation continues to be stubbornly high.
According to BNN Bloomberg, the Fed stated it will not consider lowering interest rates until there is greater confidence that price increases are on a sustainable path to reaching their two percent target.
During a recent meeting where they maintained the key rate at approximately 5.3 percent, a two-decade high, several unexpected reports on economic growth and prices challenged their previous belief that inflation was easing consistently.
The high interest rates combined with persistent inflation could potentially affect President Joe Biden’s chances of re-election.
Chair Jerome Powell stated at a news conference, “In recent months, inflation has shown a lack of further progress toward our two percent objective.”
He also mentioned, “It is likely that gaining greater confidence will take longer than previously expected.” Despite these setbacks, Powell maintained a positive outlook on inflation, expecting it to decrease over the year.
Initially, Wall Street traders responded positively to the possibility of future rate cuts and Powell's remarks that there were no plans to increase rates again to combat inflation.
“I think it’s unlikely that the next policy rate move will be a hike,” Powell commented. However, stock prices eventually fell back to their initial levels post-conference.
Powell outlined several scenarios for the upcoming months, suggesting rate cuts might be delayed if hiring remained robust and inflation did not decrease.
On the other hand, a cooling in inflation or an unexpected rise in unemployment could lead to a reduction in the benchmark rate, which would lower the cost of consumer and business borrowing over time.
Economist Jonathan Pingle from UBS interpreted these comments as an indication of the Fed's uncertainty about the direction of future policies. He noted a lack of confidence from the Fed in predicting their policy path.
Previously, in their last meeting on March 20, officials had forecasted three rate cuts in 2024, starting in June. However, persistent high inflation has adjusted market expectations to foresee only one rate cut this year, likely in November.
Inflation has slightly cooled from a peak of 7.1 percent to 2.7 percent, as per the Fed’s preferred measure, thanks to improvements in supply chains and reductions in some goods’ prices.
However, average prices are still significantly higher than before the pandemic, with services like housing, healthcare, dining, and auto insurance continuing to see price increases.
With the presidential election looming, economic dissatisfaction, particularly regarding the speed of price increases, is prevalent among Americans.
Additionally, the Fed announced a slowdown in the unwinding of a major COVID-era policy—the purchase of several trillion dollars in Treasury securities and mortgage-backed bonds aimed at stabilizing financial markets and maintaining low long-term rates.
The central bank will now allow $25bn in Treasuries to mature each month instead of $60bn, while continuing to let $35bn in mortgage-backed bonds mature monthly.
By reducing its bond holdings more slowly, the Fed might keep longer-term rates, including mortgage rates, higher than they might otherwise be, as other buyers will need to absorb these securities, possibly requiring higher interest rates to attract buyers.
Despite concerns, the US economy appears healthier and hiring stronger than most economists anticipated. The unemployment rate has been below 4 percent for over two years, marking the longest such streak since the 1960s.
Although economic growth was just 1.6 percent in the first quarter of the year, consumer spending was robust, suggesting continued economic expansion. Powell also dismissed concerns about potential stagflation, citing current conditions as considerably more stable than those during the 1970s stagflation crisis.
