Key takeaways from the latest Fed meeting

Key takeaways from the latest Fed meeting

The Federal Reserve said on Wednesday it was keeping interest rates at their current levels, as warmer-than-expected inflation data continued to push back the timing of the first rate cut.

Fed officials have kept their benchmark lending rate at a 23-year high since July, after raising rates aggressively starting two years ago.

Officials said they needed to have enough confidence that inflation was under control before lowering borrowing costs, but the latest figures showed “there is a lack of further progress,” according to their latest policy statement.

US stocks closed mixed on Wednesday after Fed Chairman Jerome Powell stated twice during a press conference that policymakers believe interest rates are “limiting” enough and that it is “unlikely” that the central bank will raise rates again in this cycle. The high-end Dow closed higher on Wednesday by 87 points, or 0.2%. The S&P 500 fell by 0.3% and the Nasdaq was also down 0.3%.

The Fed also announced Wednesday that it is easing its grip on the economy by shrinking its multi-trillion dollar balance sheet at a slower pace. The central bank’s main tool is its key interest rate, but it also uses its balance sheet to either help stimulate or slow the economy, and it has done the latter to fight inflation. Starting in June, the Fed will let up to $25 billion in Treasuries from its portfolio mature each month without replacing them, down from $60 billion a month currently.

Here are key takeaways from Powell’s latest comments and what to expect from the Fed in the coming months.

Powell said another rate hike was unlikely
Chairman Powell first acknowledged that the slowdown in inflation had stalled during talks last month. He continued to express that sentiment on Wednesday.

“So far this year, the data does not give us greater confidence. In particular, as I mentioned earlier, readings on inflation have exceeded expectations,” Powell said, adding that it may “take longer than previously expected” for Fed officials to feel confident enough to cut rates.

The string of disappointing inflation numbers not only caused some serious damage to the possibility of a rate cut over the summer, but it also sparked conversations about another possible rate hike.

But Powell said that it is “unlikely that the next policy rate move will be a hike,” noting that officials need to see “persuasive evidence that our policy stance is not restrictive enough to bring inflation down sustainably to 2%.”

His views on the timing of rate cuts
It’s unclear when the Fed will finally start cutting interest rates, but Powell said there are a number of scenarios that could trigger a rate cut, including a scenario where inflation continues to slow as both the economy and the job market remain strong — a “Goldilocks” type of situation. off

He said a continued strong economy, coupled with stagnant inflation, would only cause the Fed to delay rate cuts, but added that “unexpected weakness in the labor market” could hasten the first cut.

The overall job market remains robust, with unemployment still below 4% and employers continuing to hire at a brisk pace. The Labor Department released April figures on hiring, wage growth and unemployment on Friday.

When asked if he still agreed with Fed officials’ median projection of three rate cuts in 2024, Powell did not give a direct answer.

Still betting that inflation will continue to slow
Economists still widely expect inflation and the broader US economy to continue to cool in the second half of the year. Powell also thinks so.

Interest rates are high, the pandemic is draining savings, Americans are piling up credit card debt and still high inflation continues to weigh on people’s budgets. All that is expected to pull the reins of the economy in the coming months.

The Fed’s aggressive rate hike campaign has already had some impact on certain pockets of the economy, such as housing and business deal-making. Mortgage rates soared as the Fed raised rates, leading to home sales plunging to their lowest levels in decades last fall. Mergers and acquisitions slowed significantly in the second half of 2022 as the Fed raised rates.

Powell also pointed to a gradual slowdown in the labor market from 2022 when job openings exceed the number of unemployed job search by the widest margin in history.

However, the wider economy has yet to feel the full impact of high interest rates. The economy grew strongly in 2023, thanks to strong household spending, even as the Fed raised rates to their current levels. A strong job market was key in generating spending last year and there are currently no signs of a sharp recovery on the horizon.

But inflation is stuck and, coupled with economic resilience, the Fed is expected to push back the timing of its first rate cut, according to futures and forecasts from analysts at major banks. JPMorgan and Goldman Sachs project the first cuts will come in July, while Wells Fargo is betting on September and Bank of America estimates the first cuts in December.

Wall Street’s best bet for the first rate cut is in November, according to FedWatch’s CME Tool. Economists say the bar for another rate hike is very high and most forecasters are not currently counting on it.

Powell is waiting for private data that shows the decline in rents is finally flowing into the government’s inflation gauge. The Fed chief also hinted that the economy is not in stagflation.

“I don’t really understand where it came from,” he said.