Federal Reserve officials left interest rates unchanged on Wednesday and continued to forecast that borrowing costs would fall somewhat by the end of the year as inflation eased.
Central bank policymakers have been grappling with two years of rapid inflation since this month, and while they are encouraged by recent progress, they are not yet ready to declare victory against inflation. Although they have signaled that interest rate cuts are possible in the coming months, they have kept interest rates at high levels, which are expected to weigh on growth and inflation.
Officials kept interest rates steady at around 5.3 percent, which were fixed in July-March. Policy decision.
Policymakers also released a new package Quarterly Economic Estimates Borrowing costs are forecast to end 4.6 percent in 2024, the first time since December. That unchanged forecast suggests they still expect to make three-quarter point rate cuts this year.
Central bankers are trying to steer the economy toward a soft landing — a situation where inflation returns to normal without a painful economic recession that would sharply raise unemployment. They want to make sure they keep interest rates high enough to fully bring inflation under control, but avoid overdoing it and causing a recession.
“The risks are really two-sided here: If we taper too much or too quickly, we're in a situation where we could see inflation come back,” said Fed Chairman Jerome H. Powell explained during a news conference on Wednesday. . “If we ease too late, we could do unnecessary harm to employment.”
Given those risks, officials are only cautiously creeping toward rate cuts. Mr. Powell, in an apparent attempt to keep the Fed's options open, declined to give any indication when asked when rate cuts might begin.
As the Fed has yet to begin cutting rates, some of the cuts expected this year could come in the months leading up to the November election. That could open the central bank to criticism. Former President Donald J. Trump has often pushed for lower interest rates during his time in office.Politics“Mr. Powell wants to cut borrowing costs before the election.
But Yelena Shulyatyeva, senior economist at BNP Paribas, noted that rate cuts could come before the election. Many economists and Investors are now expecting A move in June. And Gennady Goldberg, rate strategist at TD Securities, said Fed officials can offset any political risk by clarifying why they're making their moves: because economic conditions have changed.
“They will do their best to ignore inappropriate comments,” said Mr. Goldberg said the central bank, which is independent of the White House, has adjusted the cost of borrowing in elections years ago, and it's “a matter of communication.”
The rate cuts would mark a new phase in the central bank's fight against inflation.
Central bank officials have raised rates rapidly from March 2022 to mid-2023 in an attempt to put the brakes on the economy. But they halted the increase after July as inflation began to ease sharply at the end of last year.
Price hikes are now much more moderate than they were a few years ago. The consumer price index was 3.2 percent in February, down sharply from a peak of 9.1 percent in 2022. The central bank's preferred measure of inflation, the personal consumption expenditure index, has been out of late, but it has also fallen significantly. It was 2.8 percent in January after stripping out food and fuel costs for a sense of the underlying “core” price trend.
Central bank officials have signaled in recent months that they expect to cut interest rates this year because cool inflation means the central bank doesn't need to slow the economy too aggressively.
Higher interest rates weigh on demand by making it more expensive to borrow money to buy a home or expand a business, causing a chain reaction that dampens the economy and cools the job market. This helps reduce inflation, but it also risks creating a painful recession.
However, inflation remains above the central bank's 2 percent target even after the 2023 hike, and its descent has recently stalled. January and February inflation was warmer than expected. Officials still believe that price increases will continue to fade this year, but they are monitoring incoming data to suggest they may be wrong.
Policymakers have suggested they need more “confidence” that inflation will return to 2 percent before they start cutting interest rates.
The recent price increase “certainly doesn't improve our confidence,” Mr. Powell said, “We don't really know if it's a bump in the road or something else — we'll have to find out.”
Mr. Powell said.
“They don't really change the overall story,” he said, adding that inflation is gradually moving “on a bumpy path at times” to 2 percent.
Mr. Powell made it clear that officials are keeping a close eye on inflation as they ponder the path forward for interest rates, but that officials are also examining other business conditions.
The economy has maintained impressive momentum while interest rates are near two-decade highs. In 2024, 2025 and 2026, central bank officials forecast growth to be stronger than previously expected, based on their new estimates. Officials also forecast this year's unemployment rate to be slightly lower than previously expected.
Mr. Powell suggested that a strong job market would not be a reason to hold off on cutting interest rates. Last year, the job market for immigrants and other workers grew strongly, but that didn't stop inflation from slowing.
But if the economy maintains high momentum, that means higher interest rates are needed to slow it down over time.
Officials forecast a slightly lower rate cut in 2025 than previously expected, removing one rate cut from their forecast for the following year.
The central bank also discussed plans for its bond balance sheet at the meeting. Mr. said that the authorities have not taken any decision. Powell said, but he signaled that they may soon begin to slow down efforts to draw down their security reserves.
The central bank's balance sheet grew during the pandemic as the central bank bought large amounts of bonds, first to calm markets and then to stimulate the economy. Authorities want those stocks to return to a more normal level so they don't play such a large role in financial markets. At the same time, they want to avoid overdoing the reduction to the point of risking market distortions.
But for now, markets are attuned to what's likely to happen, particularly with interest rates — how much they're going to fall and when they'll start.
Mr. Stocks rose as Powell spoke, and his comments could be interpreted as a sign that officials are still willing to cut rates until there is an improvement in inflation.
“We're still looking for good data, and we'd certainly welcome that,” said Mr. Powell concluded.
