- The Federal Reserve held interest rates steady, keeping the benchmark federal funds rate in the targeted range of 5.25%-5.5%
- The Fed noted a “lack of further progress” in getting inflation back down to its 2% target
- The central bank decided to ease the pace of reducing its bond holdings, slowing down the quantitative tightening program starting in June
The Federal Reserve held interest rates steady on Wednesday, keeping its benchmark rate unchanged as it continues battling stubbornly high inflation. The Fed acknowledged ongoing challenges in bringing prices down to its 2% target.
The Fed’s Decision
The Federal Open Market Committee voted to keep the federal funds rate in a range between 5.25-5.50%, where it has remained since the last rate hike in July 2023. Rates are now at their highest level in over two decades.
In its statement, the Fed noted a “lack of further progress” in reducing inflation back to 2%. It said another rate cut is unlikely until it gains more confidence that inflation is moving down on a sustainable path.
The Fed also slowed the reduction of its balance sheet, signaling a small easing of monetary tightening. Starting in June, it will lower the monthly cap on rolling off Treasury holdings to $30 billion from $60 billion.
The Economic Backdrop
In recent months, inflation has remained stubbornly high even as economic growth has slowed. The Fed’s preferred inflation gauge is running at a 2.7% annual rate, with core inflation even higher at 2.8%.
GDP grew at a disappointing 1.6% pace in Q1, raising concerns over stagflation. Meanwhile, the latest employment cost data showed the biggest increase in a year, sparking another sell-off in markets.
Outlook for Rates
Markets have dramatically repriced rate cut expectations this year. Where once six cuts were priced in, now only one is expected in late 2024. Fed officials have stressed patience on easing as they want clear evidence inflation is falling sustainably.
Conclusion
With inflation still too high in the Fed’s view, it is reluctant to lower rates yet. The path forward remains uncertain, and further disinflation progress is not guaranteed. The Fed stressed it will continue to make decisions on a meeting-by-meeting basis going forward.
