Fed keeps interest rates at 23-year high for 6th consecutive meeting

Washington
CNN
—

The U.S. Federal Reserve said Wednesday it would keep interest rates unchanged at current levels as better-than-expected inflation data continues to push back the timing of the first rate cut.

Fed officials have held the benchmark lending rate at a 23-year high since July, after starting to raise rates aggressively two years ago.

Officials have said they need to have sufficient confidence that inflation is under control before cutting borrowing costs, but the latest policy statement said the latest figures showed that “further progress is being made.” This indicates that there is no such thing. The US economy also remains strong, meaning the Fed is in no hurry to cut interest rates.

Consumer prices continued to rise stubbornly during the first three months of the year, mainly due to sustained price pressures in housing and the broader services sector. Rising gas prices in the past few weeks have also pushed up overall inflation. Not only did inflation stall in the first quarter, but wage growth also picked up momentum, according to the latest employment cost index released on Tuesday. The latest economic data does not portend lower interest rates in the coming months.

Fed Chairman Jerome Powell recently said that the first rate cut would likely come before the end of the year, but he could easily change his mind if the numbers continue to disappoint. The Fed president also said that a “rebalancing” of the job market was contributing to lower inflation, but the latest ECI data undermines that view. The overall job market remains strong, with the unemployment rate remaining below 4% and employers continuing to hire workers at a brisk pace. The Labor Department will release April employment, wage growth and unemployment statistics on Friday.

The Federal Reserve also announced Wednesday that it would reduce the economic impact by shrinking its massive multitrillion-dollar balance sheet at a slower pace. Central banks' main tool is their key interest rates, but they also use their balance sheets to either stimulate or slow the economy, the latter to fight inflation. Starting in June, the Fed plans to let up to $25 billion in U.S. Treasuries mature each month from its portfolio without replacing them, down from the current $60 billion per month.

Economists still widely expect inflation and the overall U.S. economy to cool further in the second half of this year. Interest rates are high, savings decimated by the pandemic, Americans are racking up credit card debt, and high inflation continues to weigh on Americans' household budgets. All of this is expected to tug at the reins of the economy in the coming months.

The Fed's aggressive rate hike campaign is already having some impact on parts of the economy, such as housing and business transactions. Home sales plummeted to multi-decade lows last fall as mortgage rates rose as the Federal Reserve raised interest rates. Mergers and acquisitions slowed sharply in the second half of 2022 as a result of the Fed's interest rate hikes.

Still, the economy as a whole has yet to feel the full impact of high interest rates. Despite the Fed raising interest rates to current levels, the economy expanded steadily in 2023 thanks to strong household spending. A strong job market was key to boosting spending last year, but there are currently no signs of a sharp economic downturn.

But futures and big bank analysts predict that stalled inflation, coupled with a resilient economy, means the Fed will delay its first rate cut. JPMorgan and Goldman Sachs expect the first rate cut to occur in July, Wells Fargo expects it in September, and Bank of America expects the first rate cut in December. I expect it to be done.

According to the CME FedWatch tool, November is currently the best time for Wall Street to make its first rate cut. Economists say the bar for another rate hike is so high that most forecasters are not predicting it at this point.

This story is in development and will be updated.