Fed says rates on hold at two-decade high until inflation further cools

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The United States Federal Reserve signalled fresh concerns about inflation as it reaffirmed it needs more evidence that price gains are cooling before cutting interest rates from a two-decade high.

Officials unanimously decided to leave the target range for the benchmark federal funds rate at 5.25 per cent to 5.5 per cent — where it’s been since July — following a slew of data that pointed to lingering price pressures in the United States economy.

“So far this year, the data have not given us that greater confidence in particular” that rate cuts are appropriate, chair Jerome Powell said at a press conference following the two-day meeting in Washington. “Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected.”

Powell said it’s unlikely that the Fed’s next move would be to raise interest rates, saying officials would need to see persuasive evidence that policy is not tight enough to bring inflation back toward the central bank’s two per cent target. “We don’t see evidence supporting that conclusion,” he added.

Still, the Fed chief stopped short of signalling rate cuts were likely this year or that rates were at a peak, which he has said previously.

In a statement Wednesday at the conclusion of the meeting, the Federal Open Market Committee said “there has been a lack of further progress toward the committee’s two per cent inflation objective” in recent months. That represented an addition to phrasing introduced in December saying that inflation “has eased over the past year but remains elevated.”

In another change, the Fed said that risks to achieving the Fed’s employment and inflation goals “have moved toward better balance over the past year,” referring to the progress in the past tense. The previous statement said the goals were “moving into better balance.”

Policymakers stopped short of signalling they would consider raising rates again.

Stocks and Treasuries rose after Powell said it’s unlikely the Fed’s next rate move would be a hike.

Officials also outlined plans to slow the pace at which the central bank is shrinking its asset portfolio. The Fed will cut the cap on runoff for Treasuries to US$25 billion a month from US$60 billion beginning in June, in a bid to reduce the risk of financial-market turbulence that struck during the previous round of balance-sheet trimming in 2019.

The cap for mortgage-backed securities (MBS) remained unchanged at US$35 billion, though the Fed will in June reinvest any principal payments above the cap into Treasuries instead of MBS.

On the balance sheet, policymakers generally agreed at the Fed’s previous meeting in March that it would be appropriate to take a cautious approach toward further runoff — a process known as quantitative tightening, or QT — given market turmoil in 2019, minutes from the meeting showed.

Officials have stressed that the decision to slow QT is independent of rate cuts and their timing.

While price pressures cooled rapidly in the final months of 2023, progress toward the central bank’s two per cent inflation goal has stalled in 2024. Meantime, the economy continues to expand on the back of a strong labour market and steady consumption and investment.

Wednesday’s statement reiterated that job gains have “remained strong” with a low unemployment rate, while the economy has expanded at a “solid pace.”

Data out Tuesday showed employment costs climbed in the first quarter at the fastest pace in a year, topping expectations and pointing to robust wage growth.

Three straight months of disappointing inflation figures have driven a major repricing of interest-rate expectations, with futures markets now showing just one cut this year.

That’s well below the three narrowly projected by Fed officials in March and the roughly six anticipated by markets at the start of 2024. Concerns that the central bank may not cut at all this year have also grown amid questions of just how much Fed policy is restraining the economy.

Against a backdrop of a resilient economy, the pickup in prices has also led to a change in tune among Fed officials. The rate cuts signalled by Powell in December relied heavily on a continued deceleration in inflation — something that hasn’t happened.

As a result, Powell said in April that it would likely take “longer than expected” to gain the level of confidence on inflation’s trajectory needed to lower interest rates. He added the central bank can keep rates steady for “as long as needed.”

The Fed’s preferred price gauge was up 2.7 per cent in March from a year earlier, an acceleration from the prior period. Excluding food and energy, it advanced 2.8 per cent.