Federal Reserve officials kept rates unchanged at 5.3% on Wednesday, while central bank governors reiterated that they needed “greater confidence” that inflation was falling before lowering the rates, according to The New York Times.
After months of rapid cool-down in early 2024, inflation has been surprisingly resilient. The Fed’s preferred inflation index has barely moved since December. While it has fallen sharply from its 2022 high of 7.1%, its current 2.7% is still well above the Fed’s 2% target. Chairman Jerome Powell stated after the central bank’s rate decision was released that “readings on inflation have come in above expectations.”
What we’ve said is that we need to be more confident that inflation is coming down sufficiently and sustainably before cutting rates. It appears that it’s going to take longer for us to reach that point of confidence.
The Federal Reserve quickly raised interest rates between early 2022 and the summer of 2023, hoping to slow the economy by reducing demand. However, higher Fed rates are trickling down to financial markets, causing mortgage, credit card and business loan rates to rise, which could eventually cool both consumption and corporate expansion.
Fed policymakers stopped raising rates last year, as inflation began to fall and the economy appeared to be cooling. They have held interest rates steady for six consecutive meetings, and as recently as March, they expected three interest rate cuts in 2024. Now, however, the recent resilience of inflation has made that less likely.
Many economists are deferring their expectations for when rate cuts will begin, with investors now expecting only one or two this year. The likelihood that the Fed will not cut rates at all this year has increased significantly over the past month.
“If we did have a path where inflation proves more persistent than expected, and where the labor market remains strong, but inflation is moving sideways and we’re not gaining greater confidence, well, that could be a case in which it could be appropriate to hold off on rate cuts.”
Investors reacted positively to Powell’s press conference, probably because he suggested that the threshold for rate hikes was high and that rates could fall under several scenarios. As Powell spoke, stocks rose and bond yields fell. Michael Feroli, chief US economist at JPMorgan, stated:
The big surprise was how reluctant Powell was to talk about rate hikes. He really seemed to say that the options are cutting or not cutting.
Key stock indexes fell in April as investors concluded that borrowing costs could stay high for longer and mortgage rates rose back above 7%, making it more expensive for many potential homeowners to buy a home.
Fed officials plan to keep rates high for a reason: they want to suppress inflation completely to prevent rapidly rising prices from becoming a more permanent part of the US economy. At the same time, policymakers are keeping a close eye on how inflation data is shaping up so they can think through their next moves.
Growth and hiring have not slowed as much as one might expect given today’s high interest rates. A key measure of wages rose faster than expected this week, and economists are now watching the employment report due on Friday closely for any hints that hiring remains robust.
In addition, there are hints that the economy is beginning to cool gradually. Overall economic growth slowed in the first quarter, although this pullback was caused by large changes in business inventories and international trade, which often fluctuate wildly from one quarter to the next. Confidence in small businesses is low and job openings have fallen significantly.
Powell stated on Wednesday that he believed higher borrowing costs were putting pressure on the economy.
“We believe that our policy stance is in a good place and is appropriate to the current situation — we believe it’s restrictive.”
As the Federal Reserve waits to cut interest rates, some economists have begun warning that the central bank’s adjustments could run counter to the political calendar. Donald Trump, the former president and presumptive Republican nominee, has already suggested that cutting interest rates this year would be a political move designed to help President Joe Biden’s re-election by pumping up the economy.
Some economists believe that cutting rates a few weeks before the election (in September or November) could embarrass the Fed, causing more discontent and potentially making the institution look political.
The Fed is independent of the White House, and its officials have repeatedly stated that they will not take politics into account when setting interest rates, but will go by reported data. Powell reiterated on Wednesday that the Fed had not and would not take political considerations into account when choosing when to change rates.
