Fed leaves rates unchanged, flags 'lack of further progress' on
inflation
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[May 02, 2024] By
Howard Schneider and Ann Saphir
WASHINGTON (Reuters) -The U.S. Federal Reserve held interest rates
steady on Wednesday and signaled it is still leaning towards eventual
reductions in borrowing costs, but put a red flag on recent
disappointing inflation readings that could make those rate cuts a while
in coming.
Indeed, Fed Chair Jerome Powell said that after starting 2024 with three
months of faster-than-expected price increases, it "will take longer
than previously expected" for policymakers to become comfortable that
inflation will resume the decline towards 2% that had cheered them
through much of last year.
That steady progress has stalled for now, and while Powell said rate
increases remained unlikely, he set the stage for a potentially extended
hold of the benchmark policy rate in the 5.25%-5.50% range that has been
in place since July.
U.S. central bankers still believe the current policy rate is putting
enough pressure on economic activity to bring inflation under control,
Powell said, and they would be content to wait as long as needed for
that to become apparent - even if inflation is simply "moving sideways"
in the meantime.
The Fed's preferred inflation measure - the personal consumption
expenditures price index - increased at a 2.7% annual rate in March, an
acceleration from the prior month.
"Inflation is still too high," Powell said in a press conference after
the end of the Federal Open Market Committee's two-day policy meeting.
"Further progress in bringing it down is not assured and the path
forward is uncertain."
Powell said his forecast remained for inflation to fall over the course
of the year, but that "my confidence in that is lower than it was."
Whether there are rate cuts this year or not remains in doubt.
"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
would be a case in which it could be appropriate to hold off on rate
cuts," Powell said. "There are paths to not cutting and there are paths
to cutting. It's really going to depend on the data."
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Despite the uncertainty of the current economic moment, Powell's
characterization of rate hikes as "unlikely" cheered investors concerned
about a newly hawkish Fed chief.
U.S. stock and bond prices turned higher as Powell preached patience
that may delay rate cuts, but also means a high bar for any more hikes.
The Fed raised its benchmark policy rate by 5.25 percentage points in
2022 and 2023 to curb a surge in inflation.
Powell's remarks on Wednesday were "notably less hawkish than many
feared," said analysts at Evercore ISI. "The basic message was that cuts
have been delayed, not derailed."
Investors in contracts tied to the Fed's policy rate increased bets that
rate cuts could begin in September rather than later in the year as
reflected in earlier market pricing.
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An eagle tops the U.S. Federal Reserve building's facade in
Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo
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BALANCE SHEET
The Fed's latest policy statement 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.
"The 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%," the Fed repeated in its
unanimously-approved statement.
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 help the cause.
"In recent months, there has been a lack of further progress towards
the Committee's 2% inflation objective," the Fed said in its
statement.
The U.S. central bank also announced it will scale back the pace at
which it is shrinking its balance sheet starting on June 1, allowing
only $25 billion in Treasury bonds to run off each month versus the
current $60 billion. Mortgage-backed securities will continue to run
off by up to $35 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 U.S. central bank is trying to keep pressure on the
economy, policymakers insist their balance sheet and interest rate
tools serve different ends.
The Fed 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."
Powell reconciled that with the relatively weak, 1.6% growth of
gross domestic product in the first quarter by saying that the 3.1%
increase in private domestic demand was a better gauge of where the
economy stands, with output buttressed by a recent jump in
immigration.
Asked about the risk the U.S. was entering a period of "stagflation"
with stagnant growth and rising prices, Powell said current
conditions are nothing like those seen in the late 1970s when prices
were rising more than 10% annually at one point alongside high
unemployment.
"Right now we have ... pretty solid growth ... We have inflation
running under 3%," Powell said. "I don't see the 'stag' and I don't
see the 'flation.'"
(Reporting by Howard Schneider; Additional reporting by Lindsay
Dunsmuir, Michael S. Derby and Ann Saphir; Editing by Andrea Ricci
and Paul Simao)
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