Federal Reserve Holds Rates Steady Amid Inflation Concerns, Boosting South African Rand

The U.S. Federal Reserve holds interest rates steady at a targeted range of 5.25-5.5% on June 15, 2023, citing ongoing inflationary concerns. The central bank noted a lack of further progress in getting inflation back down to its 2% target and said it does not expect to reduce the target range until it has greater confidence that inflation is moving sustainably toward that goal.

Fed Chair Jerome Powell expressed lower confidence that inflation will ease enough this year to warrant rate cuts in 2024. "Inflation has shown a lack of further progress toward the 2% target, and gaining greater confidence in its easing will likely take longer than previously expected," Powell stated.

The Fed also announced it will slow the pace of reducing its balance sheet, a process known as quantitative tightening, by lowering the monthly cap on Treasurys from $60 billion to $25 billion starting in June. This incremental easing measure was seen as a slight policy adjustment.

Why this matters: The Fed's decision to hold rates steady reflects a shift in its timetable on interest rates, as it now expects just one rate cut in 2024, compared to the three rate reductions projected at its last meeting in March. The ongoing measure of high interest rates and persistent inflation has emerged as a potential threat to President Joe Biden's re-election bid.

The decision led to a strengthening of the South African rand to 18.5050 against the U.S. dollar on the same day. Wall Street analysts have mixed reactions, with some officials like Michelle Bowman and Neel Kashkari suggesting the possibility of future rate hikes, while others like John Williams and Susan Collins believe it may be appropriate to cut rates later this year.

The Fed's cautious outlook comes as the U.S. economy remains healthier and hiring stronger than expected. However, the exact timing of future policy moves remains uncertain, as the Fed avoids offering specific guidance and preserves maximum flexibility. Powell emphasized the Fed's commitment to getting inflation to target while maintaining flexibility to ease policy if employment weakens meaningfully.

Key Takeaways

• Fed holds interest rates at 5.25-5.5%, citing lack of progress on 2% inflation target
• Powell expresses lower confidence in inflation easing enough for rate cuts in 2024
• Fed to slow pace of balance sheet reduction, a slight policy adjustment
• Ongoing high rates and inflation pose threat to Biden's re-election bid
• Timing of future policy moves remains uncertain as Fed preserves flexibility