The Federal Reserve has decided to keep interest rates at their current levels due to higher-than-expected inflation data. Fed officials have maintained their benchmark lending rate at a 23-year high and are waiting for more confidence that inflation is under control before considering lowering borrowing costs. US stocks closed mixed after the announcement, with Fed Chair Jerome Powell indicating that interest rates are already restrictive and unlikely to be raised again in this cycle. The Fed also announced that it will be shrinking its balance sheet at a slower pace to ease its grip on the economy.
Powell has expressed concern about the stall in inflation’s slowdown, which has dampened expectations for a rate cut and raised talk about the possibility of another rate hike. However, Powell emphasized that it is unlikely that the next policy rate move will be a hike and that they would need persuasive evidence that their policy stance is not restrictive enough to bring inflation down to 2%. The timing of a rate cut is unclear, with various scenarios that could trigger it, including a persistently strong economy with stalled inflation or an unexpected weakening in the labor market that would necessitate a cut.
Economists are predicting a cooling of inflation and the overall US economy in the second half of the year, as high interest rates, dwindling pandemic savings, and high inflation all contribute to slowing growth. The Fed’s aggressive rate-hiking campaign has already impacted certain sectors of the economy, such as housing and business deal-making. Although the full effects of high interest rates have not been felt yet, the economy expanded robustly in 2023 due to strong household spending and a solid job market.
Despite concerns about inflation and the overall economy, the timing of the first rate cut is expected to be pushed back as the Fed continues to monitor economic indicators. Analysts from major banks are projecting the first rate cut to come in July, September, or December, with the current consensus on Wall Street pointing towards November as the most likely timing. Powell is looking for private data showing declining rents to eventually impact government inflation gauges, and he has refuted suggestions of stagflation in the economy. There is a high bar for another rate hike, with most forecasters not currently estimating one.
