Federal Reserve maintains current interest rates as potential rate cut in 2024 becomes less likely

The Federal Reserve held interest rates steady Wednesday following several months of higher-than-expected inflation, with investors now not expecting a rate cut until months from now.

After a two-day meeting of its Federal Open Market Committee in Washington, D.C., the Fed announced that it will keep its rate target at 5.25% to 5.50%. The move was widely telegraphed.

Because of inflation proving sticky in the first part of the year, the timing for when the Fed might first cut interest rates has been consistently pushed back in recent weeks.

One major addition to the Fed’s policy statement is an acknowledgment that inflation has not been making progress toward the Fed’s goal as of late. The inclusion marks a more hawkish tone and could indicate that rate cuts are even further off.

“In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective,” the statement reads. Officials added that the Fed would begin slowing the shrinking of its balance sheet beginning in June.

The Fed has held rates steady since last raising interest rates in July. The current rate target is still the highest it has been since 2006, before the global financial crisis.

The Fed’s goal is for long-run inflation to run at about 2%, a level that it considers healthy for the country’s economic growth. By raising interest rates, the Fed dampens demand and can lower inflation.

Inflation as tracked by the CPI index rose to 3.5% in March, more than expected, and the producer price index rose 0.6 percentage points to 2.1%. In the Fed’s preferred gauge, the personal consumption expenditures index, inflation rose to 2.7%, also more than expected.

Every other meeting, the Fed releases its own economic and interest rate projections. During its last meeting in March, Fed officials predicted that inflation, as gauged by the personal consumption expenditures index, would fall to 2.4% by the end of the year.

Fed officials also penciled in about three rate cuts this year, although more participants are leaning into the possibility of just two cuts by the end of 2024. That calculus has likely changed since then given the hotter inflation readings.

Thus far, the resilient labor market has given the Fed insulation to keep interest rates high.

Higher interest rates are meant to filter through the economy and slow demand for goods and services, with a knock-on effect for labor. If the unemployment rate starts to rise, it would also be harmful to President Joe Biden in an election year.

Still, there are some signs that the labor market is softening.

New data released this week show job openings fell in March to just under 8.5 million, the lowest level of openings since February 2021 and below expectations. That continues a two-year trend of moderating job openings.

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Still, the overall jobs market was strong in March and added more than 300,000 jobs. The unemployment rate is at 3.8%, right around pre-pandemic levels.

The employment report for April will be released on Friday. Economists are predicting a slight pullback in hiring, although still expect job growth to remain above 240,000.