Federal Reserve officials left interest rates unchanged and signaled they were mindful of how stubborn inflation would prove, paving the way for a prolonged period of high borrowing costs.
The Fed kept interest rates steady at 5.3 percent on Wednesday, leaving them at their highest level in more than two decades, where they have been set since July. Central bankers reiterated that they needed “greater confidence” in falling inflation before they could lower it.
“Inflation data is above expectations,” Fed Chair Jerome H. Powell said at a news conference after the central bank’s interest rate decision was released.
The Fed is in a complicated economic situation. After months of rapid cooling, inflation has proven surprisingly stubborn in early 2024. The Fed’s preferred inflation index has made little progress since December, and although it has fallen significantly from its 2022 peak of 7.1 percent, its current 2.7 percent is still well above the 2 percent rate. The Fed’s goal. This calls into question how quickly and to what extent officials will be able to cut interest rates.
“What we have said is that we need to be more confident” that inflation will fall sufficiently and sustainably before we cut interest rates, Powell said. “It appears that it will take longer for us to reach that point of trust.”
The Fed quickly raised interest rates between early 2022 and summer 2023, hoping to slow the economy by curbing demand, which would in turn help control inflation. Higher Fed interest rates trickle down through financial markets to drive up mortgage, credit card and business loan rates, which over time can weaken both consumption and business expansion.
But Fed policymakers stopped raising interest rates last year because inflation began to decline and the economy appeared to be cooling, giving them confidence that they had done enough. They have held interest rates steady six times in a row and as recently as March expected to make three rate cuts in 2024. Now, however, the continued persistence of inflation makes this seem less likely.
Many economists have started pushing back their expectations for when interest rate cuts will begin, and investors expect only one or two this year. The likelihood that the Fed will not cut interest rates at all this year has increased significantly over the last month.
Mr Powell made it clear on Wednesday that officials still believed their next policy move was likely to be a rate cut, saying a rate hike was “unlikely”. However, when asked whether three cuts in 2024 were likely, he demurred.
He laid out ways the Fed would lower interest rates – or not. He said borrowing costs could fall if inflation falls or the labor market weakens.
On the other hand, “If we had a path where inflation turns out to be more persistent than expected and the labor market remains strong, but inflation moves sideways and we don’t gain greater confidence, then that could be a case.” So it might be appropriate be to hold off on rate cuts,” Powell said.
Investors reacted positively to Mr. Powell’s news conference, likely because he suggested that the hurdle to a rate hike was high and that rates could fall in several scenarios. Stocks rose and bond yields fell as Mr. Powell spoke.
“The big surprise was how reticent Powell was to talk about raising interest rates,” said Michael Feroli, chief U.S. economist at JP Morgan. “He really seemed to be saying the options were to cut or not to cut.”
Still, an extended period of high Fed rates will be felt from Wall Street to Main Street. Major stock indexes fell in April as investors concluded that borrowing costs could remain high for longer and mortgage rates climbed back above 7 percent, making home purchases more expensive for many would-be homeowners.
Fed officials plan to keep interest rates high for a reason: They want to ensure that inflation is completely suppressed to prevent rapidly rising prices from becoming a more permanent part of the American economy.
Policymakers are closely watching how inflation data evolves as they try to figure out their next steps. Economists continue to expect price increases to slow again in the coming months, particularly as rent increases on key pricing measures ease.
“I expect inflation to fall again later this year,” Powell said on Wednesday. However, he added that “my confidence is lower than before based on the data we’ve seen.”
As the Fed tries to assess the outlook, officials will also likely keep an eye on dynamics in the broader economy. Economists generally believe that prices tend to rise faster when the economy is high – when companies are hiring heavily, consumers are spending money and growth is fast.
Growth and hiring have not slowed as much as might have been expected given today’s high interest rates. A key measure of wages rose faster than expected this week, and economists are now closely watching a jobs report due out Friday for signs that hiring remains robust.
So far, however, policymakers have been generally pleased with the economy’s resilience.
This is partly because growth has been driven by improving economic supply: for example, employers have been hiring as labor supply has expanded, and partly because immigration has been rapid.
Furthermore, there are signs that the economy is gradually cooling down. Overall economic growth slowed in the first quarter, although this decline was due to large changes in business inventories and international trade, which often fluctuate sharply from quarter to quarter. Small business confidence is low. Job vacancies have decreased significantly.
Mr. Powell said on Wednesday that he believed higher borrowing costs would weigh on the economy.
“We believe our policy stance is correct and appropriate to the current situation – we believe it is hawkish,” Powell said.
As the Fed waits to cut interest rates, some economists warn that the central bank’s adjustments could clash with the political calendar.
Donald J. Trump, the former president and presumptive Republican nominee, has already suggested that cutting interest rates this year would be a policy move designed to help President Biden’s reelection by boosting the economy. Some economists believe cuts in the weeks before the election – either in September or November – could put the Fed in an awkward position, drawing even more ire and potentially making the institution look political.
The Fed is independent of the White House, and its officials have repeatedly said they will not take politics into account when setting interest rates, but rather will follow the data.
Mr Powell reiterated on Wednesday that the Fed had not and would not take political considerations into account when planning its interest rate moves.
“If you go this way, where do you stop? So we’re not on that path,” Mr. Powell said. “It’s just not part of our thinking.”
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2024-05-01 22:46:19
www.nytimes.com
