Fed wants more confidence in inflation before rate cuts can begin
January 31, 2024 – 1:27 PM PST
WASHINGTON (Reuters) – The Federal Reserve left interest rates unchanged on Wednesday but took a major step towards lowering them in coming months in a policy statement that tempered inflation concerns with other risks to the economy and dropped a longstanding reference to possible further hikes in borrowing costs.
The U.S. central bank’s latest policy statement gave no hint that a rate cut was imminent, and indeed said the policy-setting Federal Open Market Committee “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” the Fed’s inflation target.
“Inflation has eased over the past year, but remains elevated,” the Fed said in the statement after a two-day meeting, restating that officials “remain highly attentive to inflation risks.”
Speaking after the FOMC meeting in a press conference, Fed Chair Jerome Powell cautioned that the Fed’s struggle to lower inflation is not over, noting “we are not declaring victory, we think we still have a way to go.”
Powell later said he did not think officials would have that confidence in time to lower rates at the Fed’s next meeting in March.
“I don’t think it’s likely the committee will reach a level of confidence by the time of the March meeting” to lower rates, “but that’s to be seen,” Powell said, adding that a March cut is not the base case for policymakers.
The Fed’s interest rate target is “likely at its peak for this tightening cycle” and the Fed will likely cut rates “at some point this year,” Powell said, while adding it will still take time to see if the data supports an easing in monetary policy.
The FOMC statement language and Powell’s comments were a blow to investors who have been expecting rate cuts to start as early as March. The Fed’s benchmark overnight interest rate has been in the 5.25%-5.50% range since last July.
U.S. stocks fell while the dollar (.DXY) rose against a basket of currencies. U.S. Treasury yields also dropped.
“It is clear that the Fed are in no hurry to ease as rapidly as the market prices, with further promising inflation data still required in order to unlock the first rate reduction,” said Michael Brown, a market analyst at Pepperstone.
But the Fed also nodded to concerns about the employment side of its mission, and opened the door to lowering the policy rate if inflation, as expected, continues drifting lower in coming months.
The risks to meeting both the employment and inflation goals “are moving into better balance,” the central bank said, ending roughly two years in which its bias has been to moving rates higher and the risks seen as tilted towards those posed by escalating prices.
“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the FOMC said, referring to the central bank’s policy rate.
The Fed’s prior statement, issued on Dec. 13, had laid out the conditions under which it would consider “any additional policy firming,” language that excluded any consideration of rate cuts.
NO MENTION OF BANKING SYSTEM
The Fed’s statement made no reference to the health of the banking system for the first time since it was forced to shore it up last year after a string of regional bank failures. It also removed a reference to tighter financial and credit conditions as likely to weigh on economic activity, hiring and inflation.
While the statement stopped short of steering investors and the public towards the timing and pace of coming rate cuts, it did mark the current policy rate as the peak of an aggressive monetary tightening cycle that began in March of 2022 when price pressures were ramping up. Inflation peaked at a 40-year high several months later.
Inflation has now been running below the Fed’s target on a seven-month basis while U.S. economic growth and the job market have remained largely intact.
Economic activity “has been expanding at a solid pace,” the Fed said on Wednesday. Job gains “remain strong, and the unemployment rate has remained low.”
Fed officials did not issue new economic projections at their meeting this week. As of the Dec. 12-13 meeting, policymakers envisioned cutting the policy rate by 75 basis points over the course of this year, but they have been reluctant to commit to a start date until there is more data showing inflation has continued its downward trajectory.
Reporting by Howard Schneider; Additional reporting by Lindsay Dunsmuir, Michael S. Derby and Saqib Ahmed; Editing by Paul Simao and Andrea Ricci
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How did the market react to the Federal Reserve’s statement, and what were the implications for U.S. stocks, the dollar, and Treasury yields?
Title: Federal Reserve Keeps Interest Rates Unchanged as Inflation Remains a Concern
Introduction:
In its recent policy statement, the Federal Reserve decided to maintain interest rates at their current levels, but indicated a potential easing in the future. The decision reflects concerns about inflation and other risks to the economy. This article examines the Fed’s statement, its impact on the market, and the future outlook for interest rates.
The Federal Reserve’s Policy Statement:
The statement made it clear that the central bank does not anticipate an immediate rate cut. The Federal Open Market Committee acknowledged that inflation had eased over the past year but remained elevated. It emphasized the need for greater confidence in sustainable inflation levels before considering a rate reduction. Federal Reserve Chair Jerome Powell further stressed that challenges to lower inflation persist and that the Fed has further ground to cover.
Outlook for Interest Rates and Economic Indicators:
Powell indicated that the Fed’s level of confidence may not support a rate cut at the March meeting. While future rate cuts are expected in 2024, he stated that a reduction would depend on data supporting the need for monetary easing. This cautious approach disappointed investors who had anticipated rate cuts as early as March.
Market Reaction:
The market reacted to the Fed’s statement, with U.S. stocks falling and the dollar rising against other currencies. U.S. Treasury yields also dropped, indicating investor uncertainty and a desire for more encouraging inflation data to support rate reductions.
Balancing Employment and Inflation:
The Fed acknowledged the risks associated with both employment and inflation goals. The central bank highlighted that these risks were moving into better balance, suggesting a potential shift in policy. The FOMC indicated that it would carefully assess incoming data, the evolving outlook, and the balance of risks before considering any adjustments to the federal funds rate.
Changes in Statement Language:
Compared to the previous statement, this release did not mention the health of the banking system. Additionally, it removed references to tighter financial and credit conditions that could affect economic activity. These omissions indicate a shift in focus and a departure from previous concerns.
Conclusion:
While the Federal Reserve decided to keep interest rates unchanged, it hinted at possible future rate cuts. However, the central bank remains cautious due to persistently high inflation. The Fed’s current stance has disappointed investors who expected earlier rate cuts. Moving forward, the Fed will carefully examine economic indicators to determine the optimal timing for any adjustments to interest rates.
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