Federal Reserve: interest rates will remain at their highest level in two decades

WASHINGTON (AP) — The Federal Reserve emphasized Wednesday that inflation has remained stubbornly high in recent months and said it does not plan to cut interest rates until it has “increased confidence” that price increases are slowing down. sustainably to its 2% target.

The Federal Reserve issued its decision in a statement after its last meeting, in which it kept its key rate at a two-decade high of about 5.3%. Recently, several reports of better-than-expected prices and economic growth have undermined the Federal Reserve’s belief that inflation was steadily declining. The combination of high interest rates and persistent inflation has also become a potential threat to President Joe Biden’s re-election bid.

“In recent months,” Chairman Jerome Powell said at a news conference, “inflation has shown a lack of further progress toward our 2% goal.”

“Gaining greater trust,” he added, “will likely take longer than expected.”

Powell did sound a note of optimism about inflation. Despite the recent setbacks, he said, “My expectation is that over the course of this year we will see inflation come back down.”

Wall Street traders initially applauded the prospect that the Federal Reserve will cut rates at some point this year, as well as Powell’s comment that the Fed is not considering raising rates again to attack inflation.

“I think it’s unlikely that the next policy rate move will be an increase,” he said.

Later, however, stock prices erased their gains and ended the day virtually unchanged from where they were before Powell’s press conference.

Still, Powell outlined a number of potential scenarios for the coming months. He said that if hiring remains strong and “inflation moves sideways,” that “would be a case where it would be appropriate to postpone rate cuts.”

But if inflation continued to cool – or if unemployment rose unexpectedly – ​​Powell said the Federal Reserve could likely reduce its benchmark rate. Over time, the cuts would reduce the cost of mortgages, auto loans and other loans for consumers and businesses.

Those comments were “a sign that (the Federal Reserve) has much less confidence in knowing how policies will develop over the course of this year,” said Jonathan Pingle, an economist at UBS. “We were all waiting for an update on the way forward from the committee. And instead what we got was, “We really don’t have enough confidence to tell you what our path forward is going to be.” “

The central bank’s overall message on Wednesday – that more evidence is needed that inflation is slowing to the Federal Reserve’s target level before authorities begin cutting rates – reflects an abrupt shift. As recently as their last meeting on March 20, officials had projected three rate cuts in 2024, likely starting in June.

But given persistently high inflation, financial markets now expect only one rate cut this year, in November, according to futures prices tracked by CME FedWatch.

The Fed’s more cautious outlook comes after three months of data that pointed to chronic inflationary pressures and robust consumer spending. Inflation has cooled from a high of 7.1%, by the Federal Reserve’s preferred measure, to 2.7%, as supply chains have loosened and the cost of some goods has fallen.

However, average prices remain well above their pre-pandemic levels, and costs for services ranging from apartment rentals and health care to restaurant meals and auto insurance continue to rise. Six months before the presidential election, many Americans have expressed discontent with the economy, particularly the pace of price increases.

On Wednesday, the Federal Reserve announced that it would slow the pace at which it is dismantling one of its biggest policies of the COVID era: its purchase of several trillion dollars in Treasury securities and mortgage-backed bonds, an effort to stabilize financial markets and maintain them for the long term. low interest rates.

The Federal Reserve is now allowing $95 billion of those securities to mature each month, without replacing them. Its holdings have fallen to around $7.4 trillion, down from $8.9 trillion in June 2022, when it began reducing them. On Wednesday, the Federal Reserve said it would reduce its holdings at a slower pace in June.

Instead of allowing $60 billion in Treasury bonds to be liquidated each month, it will allow only $25 billion. At the same time, it will continue to let $35 billion in mortgage-backed bonds mature each month.

By trimming its holdings, the Fed could help keep long-term rates, including mortgage rates, higher than they would otherwise be. This is because as you reduce your 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 at this time. The unemployment rate has remained below 4% for more than two yearsthe longest streak since the 1960s. And while economic growth barely reached a 1.6% annual rate In the first three months of this year, consumer spending grew at a solid pace, a sign that the economy will continue to expand.

He also downplayed any concerns that the economy could be at risk of falling into “stagflation,” a toxic combination of weak growth, high unemployment and high inflation that afflicted the United States during the 1970s.

“I was around for stagflation,” Powell said, “and there was 10% unemployment, single-digit inflation. And very slow growth. Right now, we have 3% growth, which is pretty solid growth, I would say, by any measure. And we have inflation below 3%. … I don’t really see the ‘deer’ or the ‘flation.’”