The US Federal Reserve (Fed) held interest rates steady on Wednesday 1 May for the sixth straight time and acknowledged a “lack of further progress” on cooling inflation. The big picture: the Fed won’t cut interest rates as soon as it previously signalled.
“So far this year, the data have not given us that greater confidence” inflation is heading down to 2%, Fed chair Jerome Powell said at his news conference. “It is likely that gaining that greater confidence will take longer than previously expected.”
Source: Reuters
Though the Fed noted in its key policy statement that inflation had cooled over the past year, it said it remains high. And it added a new sentence that said: “In recent months, there has been a lack of further progress” toward its 2% inflation objective.
Powell added that officials “remain highly attentive to inflation risks,” and that the Fed is also “prepared to respond to an unexpected weakening in the labour market,” which suggests that bad news in the job market could trigger rate cuts.
He also poured cold water on the notion that the Fed’s next move will be to raise rates, saying, “I think it’s unlikely that the next policy rate move will be a hike.”
Financial markets in reaction were mixed: two-year Treasury yields fell below 5%. Equity markets initially rose on the Fed statement, but largely shed those gains in the last half hour of trading.
The 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.”
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 assisted by a recent jump in immigration.
Asked about the risk the US 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.'”
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