WASHINGTON — The Federal Reserve stood its ground on interest rates on Wednesday, once again deciding not to cut them as it continues to battle inflation, which has become more difficult of late.
In a widely expected move, the Fed will keep its benchmark short-term borrowing rate at a target range of 5.25%-5%. The federal funds rate has been at that level since the Fed last raised rates in July 2023, taking the range to the highest level in more than two decades.
The Federal Open Market Committee, which sets interest rates, did vote to ease the pace of reducing the bond holdings on the Fed’s massive balance sheet, which could be seen as a gradual easing of monetary policy.
The committee decided to keep interest rates unchanged and noted in a statement after the meeting that there was a “lack of further progress” in getting inflation back to the central bank’s 2% target.
“The Committee does not expect it to be appropriate to lower the target range until it has greater confidence that inflation will continue to move toward 2 percent,” the statement read, reiterating language used after the January and March meetings.
The statement also changed its description of progress toward its dual mission of price stability and full employment. The new language hedges somewhat, saying the risks of achieving both “have become better balanced over the past year.” A previous statement said risks “are moving into a better balance.”
Otherwise, the statement was little changed, describing economic growth as “solid” with “strong” job growth and “low” unemployment.
On the balance sheet, the committee said that starting in June it would slow down the pace at which maturing bond proceeds are allowed to be rolled over without reinvestment.
In a program nicknamed “quantitative tightening” that begins in June 2022, the Fed will allow a monthly rollover of up to $95 billion in proceeds from maturing Treasury bonds and mortgage-backed securities. This process has resulted in the central bank’s balance sheet falling to about $7.4 trillion, $1.5 trillion less than its peak around mid-2022.
Under the new plan, the Fed will lower the monthly cap on U.S. Treasury debt from $60 billion to $25 billion. This will reduce annual holdings by $300 billion, compared with $720 billion when the program begins in June 2022. conditions will be achieved.
Quantitative easing is a method the Fed uses to tighten policy after a spike in inflation, as it abandons its role of ensuring liquidity flows through the financial system by buying and holding large amounts of Treasury and agency debt. Therefore, the reduction in balance sheet reduction can be viewed as a mild easing measure.
The market will be watching Chairman Jerome Powell’s press conference at 2:30 pm ET for further clues on the direction of interest rates at the Fed.
The funds rate determines the fees banks charge each other for overnight loans, but also affects many other consumer debt products. The Fed uses interest rates to control the flow of funds, with the goal of curbing demand by raising interest rates to help lower prices.
However, as high prices erode household finances, consumers continue to spend, credit debt continues to rise, and savings levels continue to decline. Powell has repeatedly mentioned the harmful effects of inflation, especially on low-income people.
Although price increases are well below their peak in mid-2022, most data so far in 2024 show inflation remains well above the Fed’s 2% annual target. The Fed’s main indicator shows inflation rising at an annual rate of 2.7% – or 2.8% if food and energy are excluded from the key core indicators the Fed pays special attention to as a sign of a longer-term trend.
At the same time, the annualized growth rate of gross domestic product in the first quarter was lower than the expected 1.6%, raising concerns about the possibility of stagflation due to high inflation and low growth.
Recently, the employment cost index released this week by the Labor Department hit the largest quarterly increase in a year, once again sending shock waves to financial markets.
As a result, traders have had to reprice their expectations for interest rates in dramatic fashion. At the start of the year, markets expected at least six rate cuts, but now expect just one, likely not until the end of the year.
Fed officials have almost unanimously called for patience with easy monetary policy as they want confirmation that inflation is comfortably returning to target. One or two officials even mentioned the possibility of a rate hike if the data didn’t cooperate. Atlanta Fed President Raphael Bostic was the first to make clear that he expects only one rate cut this year, likely in the fourth quarter.
In March, members of the Federal Open Market Committee (FOMC) projected three rate cuts this year, assuming a 25-percentage-point interval, but there was no chance to update that forecast until the June 13-14 meeting.
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