Federal Reserve Holds Rates Steady, Slows Balance Sheet Reduction Amid Inflation Concerns

Fed holds rates steady, citing lack of progress on inflation; signals potential rate cuts later this year as it slows balance sheet reduction.

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Waqas Arain
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Federal Reserve Holds Rates Steady, Slows Balance Sheet Reduction Amid Inflation Concerns

Federal Reserve Holds Rates Steady, Slows Balance Sheet Reduction Amid Inflation Concerns

The Federal Reserve left interest rates unchanged at the 5.25-5.5% range on Wednesday, citing a lack of further progress in bringing inflation down to its 2% target. The central bank also announced it will slow the pace of its balance sheet reduction to $25 billion per month for Treasurys starting in June.

Fed Chair Jerome Powell acknowledged that the latest economic data has not given the Fed greater confidence that inflation is heading down as expected. "Gaining greater confidence in lowering inflation will likely take longer than previously expected, as price pressures have cooled but progress has stalled out so far this year," Powell stated.

The decision to hold rates steady comes amid higher-than-expected inflation readings, with the Fed's preferred gauge, the core Personal Consumption Expenditures index, rising 2.8% year-over-year in March. The Fed reiterated that more clarity in the outlook for inflation returning to target will be needed before cutting rates.

Why this matters: The Fed's concerns about persistent inflation suggest it is unlikely to cut rates for at least a few months, if not longer. This means borrowers can expect to continue paying high rates, with mortgage rates likely to remain above 7% and credit card rates at record highs. However, savers may find higher-interest savings accounts, with some offering yields above 5%.

Powell stressed that further progress in reducing inflation is not assured and the path forward is uncertain, with the committee needing to make decisions on a meeting-by-meeting basis. The Fed noted that the economy has continued to expand at a solid pace and job gains have remained strong.

Some Fed officials, such as Governor Michelle Bowman and Minneapolis Fed President Neel Kashkari, have indicated they would favor a rate hike if progress on inflation stalls or reverses. However, other officials, including New York Fed President John Williams, believe it will still be appropriate to cut rates later this year, though the timing and magnitude of such cuts remain uncertain.

The Fed's decision to slow its balance sheet reduction is aimed at easing its grip on the economy and potentially helping to lower borrowing costs. Powell said he thinks it's unlikely that the next policy rate move will be a hike, and he disagreed with the assessment that interest rates aren't high enough to bring down inflation. "The Fed is prepared to respond to an unexpected weakening in the labor market with rate cuts as an insurance policy," Powell noted.

Key Takeaways

  • Fed holds interest rates at 5.25-5.5%, citing lack of progress on inflation.
  • Fed to slow balance sheet reduction to $25B/month for Treasurys starting June.
  • Inflation remains high, with core PCE rising 2.8% in March, delaying rate cuts.
  • Borrowers face high rates, but savers may see higher yields on savings accounts.
  • Fed uncertain on path forward, may cut rates later this year if economy weakens.