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- The Federal Reserve is keeping its key interest rate at its highest since 2001 in an effort to push down inflation, in a widely anticipated move.
- The central bank indicated its willingness to keep interest rates higher for longer until high inflation is vanquished.
- Hopes the Fed would cut rates soon have dimmed as inflation has proven more stubborn than expected at the beginning of the year.
- The Fed funds rate staying high influences interest rates on all kinds of loans, and keeps upward pressure on borrowing costs for mortgages and credit cards among other things.
The cost of living is still rising too fast for the Federal Reserve, and the Fed is keeping interest rates high to fight inflation.
Members of the central bank’s policy committee voted unanimously Wednesday to keep the crucial fed funds rate in its current range of 5.25% to 5.50%. Officials held the rate at its highest since 2001 to fight inflation that’s run too high for comfort in the first few months of 2024 and is still far from the central bank's target of a 2% annual rate.
In an official statement, Fed officials acknowledged that progress against inflation has stalled, necessitating keeping interest rates high to discourage borrowing and spending and cool down the economy.
“In recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.” the Federal Open Market Committee said in a statement, adding language that was absent from the statement the group made when it previously met in March.
In response, the central bank is likely to keep the fed funds rate higher for longer than previously thought, Federal Reserve Chair Jerome Powell said at a press conference.
"We’ve stated that we do not expect that it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%," He said. "So far this year, the data have not given us that greater confidence ... It is likely that gaining such greater confidence will take longer than previously expected."
Data is Driving Fed to Hold Rates For Longer
Fed officials have said data have driven their interest rate decisions, and the data has pushed policymakers in a more pessimistic direction as they assess their efforts to quell high inflation that flared up as the economy reopened from the pandemic.
The annual inflation rate, as measured by the Consumer Price Index, had fallen to the 3% range at the outset of the year, down from its recent peak at 9.1% in June 2022. But the Fed’s goal of a 2% annual rate got farther away, as it rose to 3.5% as of March, dampening hopes that the Fed would be able to cut interest rates this summer.
Powell, however, dismissed the immediate need for another rate hike to tame stubborn inflation.
"I think it’s unlikely that the next policy rate move will be a hike,” Powell told reporters at Wednesday’s post-FOMC-statement press conference.
Other reports have shown that almost any way you measure it, the economy is running hot despite interest rate hikes since March 2022 that were supposed to cool it down: wage increases are accelerating, home prices are hitting record highs, and jobs remain plentiful—meaning there is little pressure on the Fed to cut interest rates to stimulate the economy and prevent a recession.
A lower fed funds rates would reduce upward pressure on interest rates for mortgages, credit cards, business loans, and other types of credit that currently come with borrowing costs at or near their highest in decades.
Fed Eases Quantitative Tightening
In another expected move, the central bank said it was slowing down the pace at which it was selling off securities from its balance sheet to $25 billion per month from $60 billion per month.
This process, known as "quantitative tightening," removes money from financial markets. It is a reversal of the "quantitative easing" campaign it engaged in during the pandemic, when it did the opposite, buying assets such as mortgage-backed securities in order to stimulate markets, and the economy, with more money.
While this move was widely anticipated, some forecasters weren't expecting the Fed to back off its tightening campaign as much as it did, with many experts predicting it would slow down to $30 billion per month.
"The Fed turns down the dial on QT a bit more than expected, which, while not a rate cut, is a dovish move," Ernie Tedeschi, former chief economist at the White House Council of Economic Advisors posted on social media platform X.