Federal Reserve officials agreed to keep interest rates at their highest level in 22 years and signaled they could cut rates later this year if signs of inflation continuing to fall to the central bank’s 2 percent target continue.
Officials on Wednesday left the central bank’s benchmark federal funds rate unchanged at a range of 5.25% to 5.5%, levels reached after 10 straight rate hikes in July last year, following a series of mixed economic data showing the economy continuing to grow rapidly while inflationary pressures are easing and the labor market is cooling.
The Fed’s statement signaled it remains patient in cutting rates and is looking for more data to build confidence that inflation is on track with its goal, which could pour cold water on investor expectations of a September rate cut.
“The Committee does not believe it would be appropriate to lower its target range until it has greater confidence that inflation is moving sustainably toward 2 percent,” the Fed said in a statement after the two-day meeting.
Speaking at a news conference after the meeting, Chairman Powell said the Fed could cut rates at its September meeting once “better data” on inflation is released.
The Federal Reserve’s next meeting is scheduled for September, followed by two more rate cuts this year in November and December. Prior to the meeting, financial markets had suggested there was a 100% chance the Fed would cut rates in September, and a very high probability of one or two more cuts this year.
Markets and the Fed have been at the mercy of inflation for the past few years. The Fed and financial markets initially underestimated inflation in 2021, expecting the increase to be small and short-lived. Last year, inflation fell more quickly than expected and ended up below expectations, despite strong labor data and a rebound in consumer spending.
The Fed was preparing to cut rates three times this year, with markets expecting more cuts as we head into the end of 2023. But a spike in inflation at the start of the year dashed investor expectations and prompted Fed officials to adopt a more cautious stance. Since then, Fed officials have frequently said they need “greater confidence” that inflation will fall to their 2% target before cutting rates. At their June meeting, Fed officials expected one rate cut this year.
