The Federal Reserve made no changes in its interest rate policy Wednesday, holding its benchmark rate at a 23-year high amid signs of stubborn inflation in the U.S. economy.
Officials on the Federal Open Market Committee said in a statement that while the economy continues to expand at a solid pace, "there has been a lack of further progress" in recent months toward reaching the Fed’s target of 2% inflation.
Speaking to reporters, Fed Chair Jerome Powell said that recent inflation data has "come in above expectations." As a result, the Fed will continue to watch the data closely for signs that inflation has finally broken, in a process that will likely take longer than expected just a few months ago. Powell said the central bank still expects to cut rates at some point this year, but there’s no certainty it will do so.
"Inflation has eased substantially over the past year while the labor market has remained strong. And that’s very good news," he said. "But inflation is still too high. Further progress in bringing it down is not ensured, and the path forward is uncertain."
Addressing speculation that the Fed might raise interest rates in response to persistently above-target inflation, Powell said it is "unlikely" that its next move would involve a rate hike. Asked by a reporter about the possibility that the U.S. economy could enter a period of stagflation, in which both inflation and unemployment rise significantly, Powell said he didn’t see the conditions for such a scenario at this point. "I don’t see the stag or the flation," he said.
What the experts are saying: Expectations for three or more interest rate cuts this year are fading fast. Diane Swonk, chief economist at KPMG, said there probably isn’t enough time left in 2024 for the Fed to cut rates as much as previously expected. "The threshold to cut is clearly lower than the threshold to hike," she said, per The Washington Post. "But they have been shaken."
Some inflation hawks on Wall Street said the Fed is running the risk of once again being late in its effort to control inflation. "Powell clearly thinks policy is restrictive but there is no evidence of that," said Michael Contopoulos, head of fixed income at Richard Bernstein, per Bloomberg. "Inflation continues to surprise to the upside. I think it is funny investors hang on his every word when this is the same Fed who said they didn’t think they would have to hike and the same Fed that less than 6 months ago said they thought they would cut 6 times in 2024."
Still, many experts expect inflation to resume its downward trend later this year, allowing the Fed to cut rates. "In our baseline, housing disinflation will come toward the end of the summer, which will most likely show up before the FOMC’s September meeting," RSM’s Tuan Nguyen wrote. "For this reason, we see the first cut coming in September, followed by another in the last quarter if the economy remains on a solid trajectory.
