Fed holds rates steady, flagging 'lack of progress' on inflation

Fed chairman Jerome Powell said 'inflation is still too high' adding that 'further progress in bringing it down is not assured'

Wed, 01 May, 2024 - 22:12

Howard Schneider

The US Federal Reserve held interest rates steady on Wednesday and signalled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the US economy.

Fed chairman Jerome Powell said it was likely to take longer than previously expected for US central bank officials to gain the “greater confidence” needed for them to kick off interest rate cuts.

“Inflation is still too high,” he said in a press conference after 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,” he said. “It is likely that gaining greater confidence will take longer than previously expected.”

Nevertheless, Mr Powell expects inflation to ease this year. “That’s my forecast,” he said. “I think my confidence in that is lower than it was because of the data that we’ve seen.”

US stock and bond prices turned higher as Mr Powell spoke, with investors embracing a view that the central bank chief was not as “hawkish” as had been feared in the wake of a run of disappointing inflation data on inflation in recent months.

Mr Powell’s remarks to reporters proved “notably less hawkish than many feared, lining up behind the FOMC statement rather than whipsawing the market,” said analysts at Evercore ISI. For Mr Powell, “the basic message was that cuts have been delayed, not derailed.”

Investors in contracts tied to the Fed’s policy rate drove up prices, betting more strongly on prospects that rate cuts could begin in September rather than later in the year as reflected in earlier market pricing.

The US central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25bn (€23.3bn) in Treasury bonds to run off each month versus the current $60bn.

Mortgage-backed securities will continue to run off by up to $35bn 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.”