federal Reserve It stressed on Wednesday that inflation has remained persistently high in recent months and said there were no plans to cut it Rate of interest Until it becomes “more confident” that price increases will continue to slow to its two percent target.
The Fed released its decision in a statement after its latest meeting, in which it kept its key rate at about 5.3%, the highest level in two decades. A series of warmer-than-expected reports on prices and economic growth recently have undermined the Fed’s confidence that inflation is continuing to ease. The combination of high interest rates and persistent inflation has also emerged as a potential threat to President Joe Biden’s re-election bid.
“In recent months,” Chairman jerome powell “Inflation has shown a lack of further progress towards our 2% target,” he said at a press conference.
“It will likely take longer than before to gain greater confidence,” Powell said.
As before, the Fed Chairman emphasized that the central bank’s decision on when to cut rates will depend on the latest economic data.
The central bank’s latest message marks a sudden change in its timetable on interest rates. As recently as their last meeting on March 20, Fed policymakers had forecast three rate cuts in 2024, possibly starting in June. Rate cuts by the Fed will, over time, reduce the cost of borrowing for consumers and businesses, including mortgages, auto loans and credit cards.
But given the continuation of elevated inflation, financial markets now expect only one rate cut in November this year, according to futures prices tracked by CME Fedwatch.
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The Fed’s more cautious outlook stems from three months of data that point to long-term inflation pressures and strong consumer spending. Inflation has declined from a peak of 7.1% to 2.7%, according to the Fed’s preferred measure, as supply chains have eased and the cost of some goods has actually declined.
However, average prices remain well above their pre-pandemic levels, and the cost of services ranging from apartment rents and health care to restaurant meals and auto insurance continues to rise. With the presidential election six months away, many Americans have expressed dissatisfaction with the economy, particularly the pace of price growth.
On Wednesday, the Fed also said it would slow the pace at which it is winding down one of its biggest COVID-era policies: purchases of several trillion dollars in Treasury securities and mortgage-backed bonds, financial An attempt to stabilize markets and keep long-term rates low.
The Fed is now allowing $95 billion of those securities to mature each month without exchanging them. Its holdings have declined from $8.9 trillion in June 2022 to about $7.4 trillion, when it began reducing them. On Wednesday, the Fed said it would reduce its holdings at a slower pace in June, allowing it to burn a total of $60 billion of bonds each month.
By cutting its stake, the Fed may contribute to keeping long-term rates, including mortgage rates, higher than they otherwise would be. This is because as it reduces its bond holdings, other buyers will have to buy the securities instead, and rates may have to rise to attract the necessary buyers.
The U.S. economy is healthier and hiring is stronger than most economists thought it would be at this point. The unemployment rate has remained below 4% for more than two years, the longest such period since the 1960s. And while economic growth only reached a 1.6% annual pace in the first three months of this year, consumer spending grew at a faster pace, a sign that the economy will continue to expand.
That economic strength has led some Fed officials to speculate that the current level of interest rates may not be high enough to have the cooling effect on the economy and inflation that they need — and to push policymakers back on rate hikes. may also be required.
But at Wednesday’s press conference, Powell tried to dismiss such speculation, saying, “I think it’s unlikely that the next policy rate increase will be a rate hike.”
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