Officials leave rates unchanged, as expected

Officials leave rates unchanged, as expected

WASHINGTON – The Federal Reserve sent a cautious signal Wednesday that it is done raising interest rates, but made clear it is not ready to start cutting rates as a rate cut in March looks increasingly unlikely.

In a significantly revised statement at the conclusion of the central bank’s two-day meeting this week, the Federal Open Market Committee removed language that had suggested a willingness to continue raising interest rates until inflation is brought under control and heading toward World War II the Fed set a % inflation target.

However, it also said there were no plans to cut interest rates yet as inflation was still above the central bank’s target. The statement also provided limited evidence that there was an increase, only outlining factors that will go into “adjustments” to policy.

“The Committee does not believe that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement said.

During Fed Chair Jerome Powell’s press conference, he said policymakers are waiting for additional data to confirm that trends are continuing. He also noted that a rate cut in March was unlikely.

“I don’t think it’s likely that the committee will reach any level of confidence by the March meeting,” Powell said.

“We want to see more good data. We are not looking for better data, but rather a continuation of the good data we have seen,” he added.

Markets initially took the news calmly, but fell after Powell’s comments raised doubts about a rate cut in March. The Dow Jones Industrial Average lost more than 300 points in the session while Treasury yields slumped. Futures prices also fluctuated, with the market assessing about a 64% chance that the Fed would remain unchanged at its March 19-20 meeting, according to calculations by CME Group.

While the committee’s statement summarized the factors policymakers would consider when evaluating policy, it did not specifically rule out further increases. A notable change was to take into account the lagged effects of monetary policy. Officials widely expect the adjustments to take at least 12 to 18 months to take effect. The Fed last raised interest rates in July 2023 after beginning its tightening cycle in March 2022.

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess the incoming data, the evolving outlook, and the balance of risks,” the statement said. This language replaced a variety of factors, including “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

“Towards a better balance”

These changes were part of a reform in which the Fed is trying to set a course for the future in which inflation falls and economic growth proves robust. The statement said economic growth had been “solid” and noted progress on inflation.

“The Committee believes that the risks to achieving its employment and inflation objectives are better balanced,” the FOMC letter said. “The economic outlook is uncertain and the committee remains highly alert to inflation risks.”

A key clause related to the “extent of possible additional policy tightening” was removed from the statement. Some Fed watchers had sought language to emphasize that further rate hikes were unlikely, but the statement at least left the question somewhat open.

At the start of the meeting, markets had expected the Fed to begin cutting its federal funds rate as early as March, with May also a possible starting point. Immediately after the decision, shares fell to session lows.

However, policymakers have been more cautious about their intentions, warning that they see no need to act quickly as the data evolves. According to CME Group, committee members suggested in December that three-quarter percentage point rate cuts were likely this year, less ambitious than the six that futures markets were pricing in.

More immediately, the committee voted unanimously for the fourth time in a row not to raise the key interest rate. The key interest rate is expected to be in a range between 5.25% and 5.5%, the highest level in almost 23 years.

The Fed is riding a wave of slowing inflation, a strong labor market and solid economic growth, giving it both room to ease monetary policy and wary of growth that could accelerate again and push prices higher again. In addition to 11 interest rate hikes, the Fed has also allowed its bond holdings to be reduced, resulting in a reduction of more than $1.2 trillion in the central bank’s balance sheet. The statement said that the balance sheet reduction would continue to progress rapidly.

The “soft landing” narrative.

Many economists are now adopting the narrative of a soft landing in which the Fed can reduce inflation without torpedoing economic growth.

Separate reports on Wednesday suggested the labor market is weakening, but so are wages. Payroll company ADP reported that private companies hired just 107,000 new workers in January, a figure that was below market expectations but still points to an expanding labor market. Additionally, the Labor Department reported that the labor cost index, a measure the Fed closely monitors for signals of inflation in wages, rose just 0.9% in the fourth quarter, the smallest increase since the second quarter of 2021.

More broadly, inflation as measured by core personal consumption expenditure prices rose 2.9% in December from a year earlier, the lowest level since March 2021. On a six- and three-month basis, core PCE prices were both at or below the Fed’s target .

In a separate matter, the Fed also announced that it would change its investment policies for both senior officials and employees. The changes expand the scope of covered individuals to include anyone with access to “confidential FOMC information.” It also states that some employees may be required to file brokerage statements or other documents to verify the accuracy of the disclosures.

The changes follow controversy over several Fed officials trading from personal accounts at a time when the central bank was making major changes to its policies in the early days of the Covid pandemic.

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2024-01-31 21:22:57