WASHINGTON- The US Federal Reserve held interest rates steady on Wednesday and signaled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings that could make those rate cuts a while in coming.
Indeed, Fed Chair Jerome Powell said that after starting 2024 with three months of faster-than-expected price increases, it “will take longer than previously expected” for policymakers to become comfortable that inflation will resume the decline towards 2 percent that had cheered them through much of last year.
That steady progress has stalled for now, and while Powell said rate increases remained unlikely, he set the stage for a potentially extended hold of the benchmark policy rate in the 5.25 percent -5.50 percent range that has been in place since July.
US central bankers still believe the current policy rate is putting enough pressure on economic activity to bring inflation under control, Powell said, and they would be content to wait as long as needed for that to become apparent – even if inflation is simply “moving sideways” in the meantime.
The Fed’s preferred inflation measure – the personal consumption expenditures price index – increased at a 2.7 percent annual rate in March, an acceleration from the prior month.
“Inflation is still too high,” Powell said in a press conference after the end of the Federal Open Market Committee’s two-day policy meeting. “Further progress in bringing it down is not assured and the path forward is uncertain.”
Powell said his forecast remained for inflation to fall over the course of the year, but that “my confidence in that is lower than it was.”
Whether there are rate cuts this year or not remains in doubt.
“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 would be a case in which it could be appropriate to hold off on rate cuts,” Powell said. “There are paths to not cutting and there are paths to cutting.
It’s really going to depend on the data.”
Despite the uncertainty of the current economic moment, Powell’s characterization of rate hikes as “unlikely” cheered investors concerned about a newly hawkish Fed chief.
US stock and bond prices turned higher as Powell preached patience that may delay rate cuts, but also means a high bar for any more hikes. The Fed raised its benchmark policy rate by 5.25 percentage points in 2022 and 2023 to curb a surge in inflation.
