Fed leaves interest rates steady as officials debate timing for cuts (2024)

At a news conference after the Fed’s two-day meeting, Powell said officials were careful not to overreact to January and February data. But they aren’t ignoring it, either, as they try to wrestle inflation back down to their 2 percent target.

Recent reports “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road,” Powell said. “I don’t think that story has changed. I also don’t think that those readings added to anyone’s confidence that we’re moving closer to that point.”

As expected, central bankers left the benchmark interest rate steady at between 5.25 and 5.5 percent, the highest level in 23 years. Still, financial markets, analysts, businesses and consumers are eager for a more precise timeline on when the Fed will decide to trim rates. Major stock indexes ticked up on the Fed news, after remaining flat for much of the day.

Inflation has eased considerably since soaring to 40-year highs. But price growth is still too fast, and the Fed isn’t ready to declare victory until officials are more certain that inflation is back under control.

“We will achieve that goal,” Powell said. “Markets believe we will achieve that goal, and they should believe that, because that’s what will happen over time. But we stress over time.”

Fed officials avoid putting too much weight on one or two individual inflation reports, and Powell emphasized that point, taking a long view, said Skanda Amarnath, executive director of Employ America, a liberal think tank.

“Powell is giving more of a leash, more margin for error, so no individual data release is make or break,” Amarnath said. “They’re not going to be changing their story radically month to month.”

Slowing progress, though, are high costs for housing and rent, which continue to be a major driver of inflation. Powell continues to insist that official statistics in key inflation measures are delayed and don’t reflect real-time measures, which show rents either stabilizing or falling in major cities.

“There’s a little bit of uncertainty about when that will happen, but there’s real confidence that they will show up, eventually, over time,” Powell said.

Still, many observers are skeptical that the Fed will be able to wrestle price growth to normal levels until housing cools, too.

Every few months, officials release fresh estimates for where they think rates, inflation, growth and the job market are headed. Policymakers now think the economy will grow 2.1 percent this year, up from the 1.4 percent forecast in December. They also expect the unemployment rate will end the year at 4 percent, down slightly from previous estimates. They predict inflation will end the year at 2.4 percent — in line with previous estimates — and won’t hit the Fed’s 2 percent target until 2026.

Central bankers also slightly revised estimates for rates over the medium term, signaling that borrowing costs will be slightly higher in 2025 and 2026 than previously anticipated. (Those forecasts are not binding, and policymakers often stress that they could change for myriad factors.)

Officials also looked more closely at the pace at which they are reducing more than $7 trillion in the bank’s government bond holdings. While lowering the balance sheet is intended to raise yields on longer-term bonds, it can cause cracks in the markets and destabilize the financial system if not handled carefully. A decision on whether to change things up could come later.

After six months of encouraging inflation reports, 2024 has brought unwelcome surprises. First, inflation came in hotter than expected in January. Economists and policymakers were quick to call the report a one-off, saying seasonal glitches and other data quirks often mess with the start of the year. But then February data ticked up slightly, too.

Meanwhile, the economy has stayed remarkably strong despite the Fed’s push to slow it down. The job market is still churning, and growth continues at a solid pace. For some officials, that has tempered the desire for cuts, because recession fears have faded away.

High prices — especially for basics, such as groceries and rent — continue to be one of the key reasons Americans don’t feel optimistic about the economy, posing a challenge to the Biden administration ahead of November’s presidential election.

The Federal Reserve is loath to get involved in politics. But as the months pass, the odds grow that the Fed triggers its first cut in the run-up to Election Day, just as Republicans and Democrats center the economy in their appeals to voters.

Over the past few years, the Fed has gone through multiple stages of its inflation fight. Officials were late to respond to rising prices in early 2021, betting that the sudden pop was a temporary bug of pandemic recovery. But as it became clear that wasn’t right,, the central bank scrambled to hoist rates starting in March 2022.

By that summer, inflation reached a 40-year peak, due in part to spiking energy costs after Russia’s invasion of Ukraine. Bungled supply chains and labor shortages also pushed prices up.

The Fed continued its aggressive rate hike campaign throughout 2022 and much of 2023, stopping only in July once officials decided that rates were high enough to meaningfully slow the economy. From there, policymakers planned to hold rates high so steep costs for mortgages, car loans and all sorts of business investments could keep pressure up.

Now, Fed leaders are in yet another phase. Inflation has come down considerably, clocking in at 2.4 percent in January over the year before.

They’re in no rush to cut rates. But high rates could, in time, bring risks of their own and end up hurting the job market or slowing growth too much.

“If we ease too much or too soon, we could see inflation come back,” Powell said. “And if we ease too late, we could do unnecessary harm to employment and people’s working lives.”