Fed leaves interest rates unchanged

he Federal Reserve maintained its benchmark interest rate on Wednesday in a range of 5.25%-5.50%, the highest since 2001, and cautioned it won’t begin lowering interest rates until it sees further progress on inflation returning to its 2% target.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” the Fed said in its policy statement.

Fed chair Jerome Powell at his Wednesday afternoon press conference pushed back on market expectations for a cut as early as March, saying that’s “probably not the most likely case or what we’d call the base case.”

I don’t think it’s likely the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to [cut rates].”

He said that the Fed didn’t need to see “better data,” but just “more good data” and a “continuation of the data we have been seeing.”

“It’s not that the six months data isn’t good enough,” Powell said, referring to recent readings showing that the Fed’s preferred inflation gauge is below the central bank’s target. “It is.”

Rather, Powell said the central bank would like to see “more evidence that confirms what we think we’re seeing” regarding the recent drop in inflation.

Asked whether the Fed had successfully reached a soft landing at this point, Powell said, “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.”

He added, “Certainly, we’re encouraged by the progress but we’re not declaring victory at this point.”

‘Moving into better balance’
Officials last raised rates in July 2023 and expect to cut rates sometime this year, with the median expecting three rate cuts.

Fed officials did make it clear Wednesday that cuts are likely on the way at some point, noting that the risks to achieving price stability and maintaining full employment are “moving into better balance.”

The central bank also changed language from prior statements that had previously left room for rate hikes.

On Wednesday, the Fed more broadly referred to “any adjustments” it may need to make to its interest rate policy in the future.

The Fed had, in prior statements, made reference to the potential need for “any additional policy firming” should inflation not continue moving towards its goal.

Following the Fed’s announcement on Wednesday, data from the CME Group showed markets initially suggested a roughly 55% chance that the Fed begins lowering interest rates in March. But once Powell made it clear that March was likely off the table, those odds fell to 36%.

Investors now predict a roughly 90% chance that at least one cut happens in May instead.

In a nod to stronger-than-expected fourth quarter GDP, Fed officials characterized the economy as “expanding at a solid pace.” The Fed characterized job gains as having “moderated” over the last year but noted that job gains remain “strong.”

The Fed also removed language qualifying the US banking system as sound and resilient while also stripping out any talk of how tighter financial and credit conditions would weigh on households.

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