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The Federal Reserve has signaled that U.S. borrowing costs are likely to remain high for longer as it battles persistent inflation in the world’s largest economy.
The Federal Open Market Committee said after its Wednesday meeting that there had been “a lack of further progress” toward its 2 percent inflation target in recent months – an addition to its statement that actually delays rate cuts until the second half of this year. year at the earliest.
“It will probably take us longer to be sure that we are on a sustainable path to 2% inflation,” Fed Chairman Jay Powell said at a news conference. “I don’t know how long it will take,” he added.
But the Fed also indicated it was not yet considering further rate hikes to counter the recent rise in inflation, saying risks to its shared goals of full employment and moderating price pressures had “moved towards a better balance over the past year”.
“I think it’s unlikely that the next policy rate change will be a hike,” Powell said.
Powell’s comments come as the U.S. central bank keeps interest rates between 5.25 and 5.5 percent, a 23-year high in effect since the summer of 2023.
The Fed’s signal of higher and longer interest rates follows recent data showing that inflation had risen again, largely due to high fuel prices, while the U.S. economy grew more slowly than expected in the first quarter of the year.
The central bank’s comments also mean borrowing costs could remain higher for many US voters in the run-up to this year’s November presidential election. President Joe Biden said recently that he “expects those rates to come down” this year.
“The Fed’s room for maneuver has narrowed significantly, with inflation rising, growth slowing and the policy calendar becoming an increasingly tight constraint,” said Eswar Prasad, an economics professor. at Cornell University.
“The specter of stagflation, which the Fed seemed to have definitively ruled out in 2023, is now back in the spotlight,” he added.
The Fed also announced that starting in June it would reduce the cap on the amount of U.S. Treasuries it allows to mature each month, without redeeming them, from $60 billion to $25 billion. This would still remove up to $35 billion in mortgage-backed securities from the balance sheet. Any principal repayments above the $35 billion cap would also be reinvested in Treasury bonds.
In a market where some Treasury auctions are currently reaching record sizes, slowing quantitative tightening could help support prices and push yields lower.
U.S. policymakers had hoped to cut interest rates three times this year, but higher-than-expected inflation in recent months has raised the prospect that the Fed will keep borrowing costs at current levels through 2024.
Before the meeting, futures market traders were betting between one and two cuts this year, with the first cut not fully factored in until December.
As Powell spoke on Wednesday, U.S. stocks rose, reversing earlier losses, while Treasury yields fell. The two-year yield, which moves with interest rate expectations, slipped 0.09 percentage points to 4.94 percent. Market expectations for a rate cut later this year, as seen in the futures market, barely budged midway through the news conference.
The Fed’s statement Wednesday came after recent price data showed its progress in reducing inflation in 2023 had stalled this year.
The measure of personal consumption spending, on which the Fed’s 2 percent target is based, rose slightly in March, to 2.7 percent, compared with 2.5 percent in the year through February.
Policymakers’ preferred indicator of underlying price pressures, core PCE, which excludes volatile food and energy prices, was unchanged at 2.8 percent.
While progress on inflation has stalled, economic growth has also declined, with gross domestic product falling in the latest quarter at an annualized rate of 1.6 percent, compared to 3.4 percent in the fourth quarter 2023.
Analysts also warned that unrest in the Middle East could push up oil prices, worsening inflation in other goods.
Rising fuel prices have led some analysts to warn of the prospect of “stagflation” if energy prices continue to rise as economic growth slows.
