The Federal Reserve has decided to maintain unchanged interest rates amid concerns of persistent inflation risks. In a statement, Fed officials acknowledged a lack of progress towards their 2 percent inflation target and stated that the economic outlook remains uncertain. The Federal Open Market Committee (FOMC) is closely monitoring inflation risks and will adjust monetary policy if necessary.
The decision to keep interest rates unchanged was largely expected by market watchers, who have been speculating on whether the Fed will become more hawkish or dovish in the coming months. Greg McBride, the chief financial analyst at Bankrate, noted that the Fed’s mention of the lack of progress towards their inflation target suggests that interest rate hikes are not imminent.
Fed Chair Jerome Powell stated that the current policy rate is still restrictive and is weighing on demand, including in the labor market. While he does not believe the next policy move will be a hike, Powell assessed various economic outlooks that could suggest interest rates need to stay higher for longer. This comment sparked a rally in U.S. stocks and caused U.S. Treasury yields to decline.
Powell also expressed his expectation for a continued decline in inflation, although his confidence in this prediction is lower than before. He dismissed fears of stagflation, stating that the economy is experiencing solid growth, slowing inflation, and low unemployment.
One of the more notable decisions from the FOMC meeting was the decision to slow down the reduction of the Fed’s securities holdings. The reduction cap on Treasuries will be decreased from $60 billion to $25 billion per month starting in June. This change in policy raised questions about potential liquidity stress that the Fed may be concerned about.
Over the past month, it has become clear that the Fed has shifted its policy stance and is no longer considering rate cuts. Previously, the Fed had signaled the possibility of rate cuts, but recent data have not given them greater confidence in achieving their inflation target. The futures market is now only predicting one or two quarter-point reductions later this year.
Jeff Klingelhofer, co-head of investments and portfolio manager at Thornburg Investment Management, believes it was a mistake for the Fed to suggest rate cuts. He argues that inflation is sustainably high and accelerating, and therefore, the Fed will likely only cut rates once this year.
According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model, the next Consumer Price Index (CPI) report is expected to show an annual inflation rate of 3.5 percent, well above the Fed’s target rate of 2 percent. The bank also forecasts that the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, will remain at 2.7 percent.
Overall, investors are not heavily anticipating a rate hike, but they expect interest rates to remain higher for longer as monetary policymakers wait for tighter policy to take effect. The Fed will continue to closely monitor inflation risks and make adjustments to monetary policy as necessary.
