Fed Says Inflation Progress Has Stalled and Extends Wait-and-See Rate Stance

Fed Says Inflation Progress Has Stalled and Extends Wait-and-See Rate Stance

WASHINGTON—The Federal Reserve acknowledged a recent setback in its inflation fight but said it was more likely to keep interest rates at their current level for longer than to raise them again.

Officials held their benchmark federal-funds rate steady Wednesday at a range between 5.25% and 5.5%, the highest in two decades and a level it reached last July, following a run of economic data that revealed simmering price pressures in the economy.

Fed Chair Jerome Powell indicated that the bar to cut interest rates had gone up, but that the bar to hike rates was even higher.

“It’s likely to take longer for us to gain confidence that we are on a sustainable path” to lower inflation, Powell said. He said he expected inflation would resume its decline this year, but added, “my confidence in that is lower than it was.”

At the same time, he said, for officials to put hikes back on the table, they would need persuasive evidence that higher interest rates weren’t bringing down inflation. “That’s not what we think we’re seeing,” Powell said. “That will be a question that the data will have to answer.”

In the run-up to Wednesday’s announcement, investors had been squirrelly over the prospect that Powell might entertain rate hikes. Stocks moved higher after Powell said he thought rate hikes were unlikely, but then they reversed course as investors digested his comments.

The S&P 500 rose as much as 1.2% in the afternoon, then closed down by 0.3%. The turnaround marked the index’s biggest blown gain in more than a year.

“The hurdle to hike is higher than the market had priced in,” said Michael de Pass, global head of rates trading at Citadel Securities. “They feel comfortable with where policy is.”

Separately, the central bank approved plans to slow the ongoing reduction of its $7.4 trillion asset portfolio in a bid to extend the wind-down of emergency pandemic stimulus efforts it launched four years ago.

The Fed lifted rates rapidly from near zero in 2022 to combat inflation that reached a 40-year high. The fed-funds rate influences other borrowing costs throughout the economy, such as on mortgages, credit cards and business loans. The 30-year fixed-rate mortgage stood at 7.17% last week, up from 6.61% at the end of last year, according to Freddie Mac.

Higher rates have also boosted the U.S. government’s cost of interest payments on more than $27 trillion in publicly-held debt. Those expenses are on pace to surpass military spending this year.

Some analysts said they were surprised that Powell didn’t begin to entertain a more wholesale rethink about whether policy was tight enough amid signs that some hard-hit sectors of the economy, including manufacturing and housing, might be through the worst of the hit from higher rates.

“They are sticking to their story until they get enough information that they have to shift,” said William English, a former senior Fed economist who is a professor at Yale School of Management. “If this continues to look bad on the inflation front, they will have to respond at some point” by putting a rate increase on the table, “but they didn’t lay the groundwork for that today.”

Policymakers had been surprised late last year by a string of benign inflation readings, opening the door to conversations about potential cuts and fueling market rallies. But inflation in the first three months of this year derailed hopes that the central bank would be able to follow through on those cuts anytime soon.

A measure of inflation that strips out volatile food and energy prices stood at 2.8% in March from a year earlier, down from 4.8% in March 2023. But the 12-month measure masks the more recent setbacks: Over the six months through March, prices rose at an annualized 3.0% rate, up from 1.9% for the six months ended in December. The Fed targets 2% inflation over time.

Not satisfied with 3%

Some Fed officials have said in recent weeks that high interest rates might not be as restrictive as previously anticipated, casting doubt on whether rate cuts would be warranted this year and whether rate hikes might be back in play should monthly inflation readings run at a pace more consistent with inflation above 3%.

“Of course, we’re not satisfied with 3% inflation,” Powell said. “‘Three percent’ can’t be in a sentence with ‘satisfied.’ ”

Nevertheless, he suggested the bar to resume rate hikes would require something more serious than inflation stalling out around its current level. “If we did have a path where…inflation is moving sideways and we’re not gaining greater confidence, well, that would be a case in which it could be appropriate to hold off on rate cuts,” he said.

Powell outlined two other scenarios: One in which the labor market showed material and unexpected weakness and another in which inflation resumed the decline seen last year. “Those are paths in which you could see us cutting rates,” he said.

The stakes are high for Fed officials, who are trying to navigate two risks. One is that they ease too soon, allowing inflation to become entrenched at a level above their 2% target. The other is that they wait until the economy crumples under the weight of higher rates.

Democrats have been nervous that higher rates are sapping consumer sentiment and risking a slowdown ahead of November’s elections. Some economists, meanwhile, have said government spending, including on infrastructure and subsidies for clean-energy investment, is complicating the job of bringing inflation down by adding more fuel to economic activity.

Write to Nick Timiraos at [email protected]