Fed holds rates steady, noting lack of progress on inflation

Federal Reserve officials left interest rates unchanged and signaled that they were wary about how stubborn inflation was proving, paving the way for a longer period of high borrowing costs.

The Fed held rates steady at 5.3% Wednesday, leaving them at a more than two-decade high, where they have been set since July. Central bankers reiterated that they needed “greater confidence” that inflation was coming down before reducing them.

“Readings on inflation have come in above expectations,” Jerome Powell, the Fed chair, said at a news conference after the release of the central bank’s rate decision.

The Fed stands at a complicated economic juncture. After months of rapid cooling, inflation has proved surprisingly sticky in early 2024. The Fed’s preferred inflation index has made little progress since December, and although it is down sharply from its 7.1% high in 2022, its current 2.7% is still well above the Fed’s 2% goal. That calls into question how soon and how much officials will be able to lower interest rates.

“What we’ve said is that we need to be more confident” that inflation is coming down sufficiently and sustainably before cutting rates, Powell said. “It appears that it’s going to take longer for us to reach that point of confidence.”

Many economists have begun to push back their expectations for when rate reductions will begin, and investors now expect only one or two this year. Odds that the Fed will not cut rates at all this year have increased notably over the past month.

Powell made it clear Wednesday that officials still thought that their next policy move was likely to be a rate cut and said that a rate increase was “unlikely.” But he demurred when asked whether three reductions were likely in 2024.

He laid out pathways in which the Fed would — or would not — cut rates. He said that if inflation came down or the labor market weakened, borrowing costs could come down.

On the other hand, “if we did have a path where inflation proves more persistent than expected, and where the labor market remains strong, but inflation is moving sideways and we’re not gaining greater confidence, well, that could be a case in which it could be appropriate to hold off on rate cuts,” Powell said.

Investors responded favorably to Powell’s news conference, likely because he suggested that the bar for raising rates was high and that rates could come down in multiple scenarios. Stocks rose and bond yields fell as Powell spoke.

“The big surprise was how reluctant Powell was to talk about rate hikes,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “He really seemed to say that the options are cutting or not cutting.”