Federal Reserve, in a widely anticipated move, kept its benchmark interest rate unchanged at the range of 5.25%-5.50% even amidst the declining inflation and rising consumer confidence. The fed officials made it apparent that they are done raising rates but aren't prepared to start rate-cutting.
Fed officials indicated that inflation has shown significant signs of deceleration, with the core Personal Consumption Expenditures (PCE) price index falling below the central bank's target for the first time since March 2021. During the press conference, Federal Reserve Chairman Jerome Powell expressed cautious optimism, acknowledging that inflation remains a concern but emphasizing that economic growth has been solid and job gains have remained strong.
No, I wouldn't say we've achieved that. We have a ways to go. Core inflation is still well above target on a 12-month basis
Jerome Powell
Federal Reserve Is Done Raising Interest Rates
Some Fed officials have been hinting that the current rate has been sufficient to bring inflation closer to the central bank's 2% objective. Since last summer, the federal funds target rate has not changed from its range of 5.25% to 5.5%, which is the result of 11 rises starting in March 2022. The rate serves as a standard for all other interest rates in the economy, including those on credit cards, mortgages, business loans, and auto loans. The Federal Reserve said on Wednesday that it will maintain current interest rates.
The Role of Labor Market
The statement released by the Fed officials noted that the labor market has shown signs of softening but remains robust, with employment costs increasing at a slower pace over the past year.
Importantly, the Fed no longer sees the need to discuss "any additional policy firming," signaling a shift in monetary policy stance. However, policymakers maintained their commitment to maintaining maximum employment and price stability and acknowledged that further progress is required before considering rate cuts.
Fed governor Christopher Waller stated that the state of the economy was "almost as good as it gets," citing a combination of decreasing inflation and continuous, stable job increases. He stated in written remarks that the progress he has noted on inflation, combined with the data in hand on economic and financial conditions, has made him more confident than has been since 2021 that inflation is on a path to 2%.
As the economy continues to respond to the Fed's past rate rises, inflation, which had been a big concern, is now beginning to decline while employment is still high. The Federal Reserve's preferred measure of inflation, the core PCE price index, dropped from a peak of 4.3% in June to 2.9% in December.
Whereas a year ago we were thinking that we needed to see some softening in economic activity, that hasn't been the case
Jerome Powell
Moving into Better Balance
The last rate increase was in July 2023. The fed officials anticipate reducing rates at some point this year, with three rate reductions projected on average. The median prediction of the committee for 2023 is three quarter-point rate cuts. However, investors are already pricing at a faster rate of decrease. Powell also mentioned the ongoing runoff of the balance sheet, stating that it will proceed according to schedule in an effort to lessen inflationary pressures.
The Fed's commitment to maintaining maximum employment and price stability remains unwavering, but its approach to monetary policy will be closely watched as investors seek clarity on the path forward.