Fed Holds Rates Steady But Sends Mixed Signals About Timing of A Cut Later This Year

Federal Reserve officials agreed to hold interest rates steady at a 22-year high and signaled they may cut rates this year if inflation continues to show signs of declining to their two percent target.

Officials held the central bank’s benchmark federal funds rate unchanged Wednesday at a range between 5.25 percent and 5.5 percent, the level it reached last July after 10 consecutive hikes, following a run of mixed economic data that revealed moderating price pressures and a cooling of the labor market even while the economy continues to grow quickly.

The Fed’s statement indicates that it remains patient on rate cuts and is still looking for more data to build confidence that inflation is moving toward its target. This may throw some cold water on investors’ expectations of a September cut.

“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 percent,” the Fed said in a statement released at the end of its two-day meeting.

In a press conference following the meeting, Powell said the Fed might cut at the September meeting if “more good data” on inflation is forthcoming.

The Fed’s next scheduled meeting is in September. After that, there are two more cuts on the calendar this year, in November and December. Prior to the meeting, financial markets had been indicating a 100 percent chance that the Fed would cut in September and very high odds that the Fed would cut one or two more times this year.

The markets and the Fed have been buffeted by inflation over the past few years. The Fed and financial markets initially underestimated inflation in 2021, expecting a smaller and shorter-lived rise. Last year, inflation surprised to the downside, falling more rapidly than expected even though the labor remark remained strong and consumer spending bounced.

Toward the end of 2023, the Fed was preparing to cut interest rates three times this year and the market was expecting even more cuts. But inflation surged higher at the start of the year, derailing investor expectations and convincing Fed officials to take a more cautious stance. Since then Fed officials have frequently said that they need “greater confidence” that inflation will move down to their two percent target before they cut rates. At their meeting in June, Fed officials projected a single rate cut this year.