The Federal Reserve left interest rates unchanged on Wednesday following its first policy meeting of 2024, dashing hopes for an imminent rate cut to boost the slowing economy. However, Fed Chairman Jerome Powell signaled the central bank could slash rates later this year if inflation and global headwinds persist.
Fed Leaves Target Range Unchanged
As widely expected, the Fed’s policy-setting Federal Open Market Committee unanimously voted to hold the target range for its benchmark federal funds rate at 4.50-4.75%, where it has remained since the last 0.25 percentage point hike in December 2023.
In his post-meeting press conference, Powell said the Fed felt rates were at the appropriate level for now based on current economic conditions. However, he stated the central bank is prepared to adjust policy if necessary.
“We want to see a continuation of good inflation data to gain confidence that it’s reached 2 percent, and if we do then we would be in a position to consider lowering the level of rates,” Powell remarked.
Slightly More Dovish Policy Stance
While ruling out interest rate reductions at the next meeting in March, Powell’s comments marked a marginally more dovish tilt. The Fed chief emphasized policymakers are now data-dependent when weighing further changes, unlike the steadfast hawkishness during 2023’s aggressive tightening campaign.
“The committee’s position on rate increases going forward will be determined meeting by meeting based on how the data actually comes in,” Powell said.
He also noted most officials anticipate “ongoing increases” in the target range will no longer be appropriate at some point this year consideringFed’s projections in December showed rates peaking at around 5% in 2023 and then declining thereafter.
Inflation Outlook Improves
Behind the Fed’s slightly less hawkish bias was another downward shift in its inflation summary. Powell stated supply chain improvements, easing housing costs, and fading consumer demand are helping reduce price pressures.
The personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, slowed to 5.5% annually in November from 5.9% in October. While still well above the Fed’s 2% goal, it marked the sixth straight monthly decline.
Officials now expect PCE inflation of 3.5% to 4% this year, down from September’s forecast of 4% to 4.5%, signaling confidence that price stability can be restored in 2024 and 2025 as monetary policy works through the economy.
Growth Concerns Remain
However, Powell cautioned about “ongoing increases” in layoffs and noted business investment has “slowed notably.” The Fed expects real U.S. GDP growth to fall to around just 1% this year amidst the sustained economic deceleration.
“Powell’s growth warnings suggest Fed fears of recession remain markedly elevated even as inflation drops,” commented Mohamed El-Erian, Allianz’s chief economic advisor.
The FOMC’s updated policy statement also contained fresh language emphasizing officials will consider the “cumulative tightening of monetary policy” and “lags in the transmission of monetary policy” when judging the appropriate stance.
Markets See Over 50% Odds of Cuts By September
U.S. equity markets sold off in the wake of the Fed decision and Powell’s remarks indicating rates will remain higher for longer. The S&P 500 and Dow Jones both fell over 1%, unwinding an earlier rally.
Market-based measures of future Fed expectations now foresee a 54% probability of at least a 25 basis point rate cut at the September policy gathering. However, traders see just a one-in-four chance of a reduction as soon as the June meeting.
“Markets are increasingly confident the Fed pivot toward accommodation is drawing near…but Powell stuck to his guns in arguing outright cuts are still some ways off,” noted analysts at TD Securities.
Fed Policy Path Remains Uncertain
With monetary policy now in data-dependent limbo and the economic outlook opaque given unpredictable geopolitical crises and financial conditions, the Fed’s next moves remain up for debate.
“There remains an exceptional degree of uncertainty around what comes next,” said veteran Fed watcher Tim Duy.
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While ruling out adjusting policy in either direction for now, Powell and the FOMC will closely monitor incoming reports on jobs, inflation, consumer spending and global developments.
Further evidence price pressures are subsiding and recession risks receding could enable Fed officials to breathe a sigh of relief, stay the course on rates through summer, and then consider trimming borrowing costs to extend the recovery later in 2024.
“We’ll get there when we get there,” Powell concluded.
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