Red flag: Fed chief signals interest rates to stay higher for longer
By Howard Schneider
The US Federal Reserve held interest rates steady and signalled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.
Indeed, Fed Chair Jerome Powell said it was likely to take longer than previously expected for Fed officials to gain the “greater confidence” needed for them to kick off interest rate cuts.
US Federal Reserve chairman Jerome Powell says interest rate cuts may be further away than expected. Credit: Bloomberg
The Fed’s latest policy statement, issued at the end of a two-day meeting, kept key elements of its economic assessment and policy guidance intact, noting that “inflation has eased” over the past year, and framing its discussion of interest rates around the conditions under which borrowing costs can be lowered.
US stocks pared losses following the release of the policy statement then jumped after Powell said it was “unlikely” that the next policy rate move would be a rise. The US dollar fell against a basket of currencies. US Treasury yields fell.
Investors in contracts tied to the Fed’s policy rate continued to see the US central bank beginning to cut rates in November and added to bets that it will deliver at least one reduction in borrowing costs this year.
“The (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 towards 2 per cent,” the Fed repeated in a unanimously-approved statement that still indicated the next move on rates will be down.
“Inflation is still too high,” Powell said in a press conference after the meeting. “Further progress in bring it down is not assured and the path forward is uncertain.”
“It is likely that gaining greater confidence will take longer than previously expected,” Powell said.
That continues to leave the timing of any rate cut in doubt, and Fed officials made emphatic their concern that the first months of 2024 have done little to build the confidence they seek in falling inflation.
The US is struggling to get inflation under control. Credit: Bloomberg
“In recent months, there has been a lack of further progress towards the Committee’s 2 per cent inflation objective,” the Fed said in its statement. Where the prior statement in March suggested an improving dynamic, saying that the risks to the economy “are moving into better balance,” the new statement hinted that the process may have stalled with its assessment that risks “have moved toward better balance over the past year.”
“The Committee marked to market on inflation by noting that Q1 data didn’t show the additional progress that they hoped to see, but the statement also suggested that they would not view further labor market strength through an inflationary lens,” said Omair Sharif, president of Inflation Insights.
The US central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $US25 billion ($38.3 billion) in Treasury bonds to run off each month versus the current $US60 billion. Mortgage-backed securities will continue to run off by up to $US35 billion monthly.
The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed’s last round of “quantitative tightening.”
While the move could loosen financial conditions at the margin at a time when the US central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.
The benchmark policy rate has been held in the current 5.25 per cent-5.50 per cent range since July. Rate cuts had been anticipated as early as March of this year, but have been pushed back as incoming inflation data showed that progress towards the 2 per cent target had stalled. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, increased 2.7 per cent in March on a year-over-year basis.
“Inflation remains elevated,” the Fed’s policy statement said, repeating a phrase that many analysts feel will likely need to be removed as a precursor to an initial rate reduction.
The statement maintained its overall assessment of economic growth, saying that the economy “continued to expand at a solid pace. Job gains have remained strong and the unemployment rate has remained low.”
Reuters
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