Fed says interest rates will remain at 20-year highs until inflation subsides further – Orange County Register

By Christopher Rugaber | The Associated Press

The Federal Reserve stressed Wednesday that inflation has remained stubbornly high in recent months and said it does not plan to cut interest rates until it has “more confidence” in the lasting slowdown in price increase to reach its 2% target.

The Fed made its decision in a statement following its latest meeting, during which it kept its key rate at its highest level in two decades, at around 5.3%. Several hotter-than-expected reports on prices and economic growth have recently shaken the Fed’s belief that inflation was steadily falling. The combination of high interest rates and persistent inflation has also emerged as a potential threat to President Joe Biden’s re-election.

“In recent months,” Wednesday’s statement said, “there has been a lack of further progress toward the 2 percent inflation goal.”

The central bank’s latest message reflects a sharp change in its interest rate timetable. As recently as their last meeting on March 20, Fed policymakers had planned three rate cuts in 2024, likely starting in June. Rate cuts by the Fed would, over time, lead to lower borrowing costs for consumers and businesses, including for mortgages, auto loans and credit cards.

But given continued high inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.

The Fed’s more cautious outlook stems from three months of data showing chronic inflationary pressures and robust consumer spending. Inflation fell from a peak of 7.1%, according to the Fed’s preferred measure, to 2.7%, thanks to loosening supply chains and falling costs of some goods.

Average prices, however, remain well above their pre-pandemic levels, and costs for services ranging from apartment rent and health care to restaurant meals and car insurance continue to rise. Six months before the presidential election, many Americans have expressed dissatisfaction with the economy, particularly with the pace of price increases.

The Fed also announced on Wednesday that it would slow the pace at which it winds down one of its biggest COVID-era policies: its multitrillion-dollar purchase of Treasury securities and collateralized bonds. mortgages, an effort to stabilize financial markets and keep longer… term rates are low.

The Fed now lets $95 billion of these securities mature each month, without replacing them. His holdings have fallen to about $7.4 trillion, from $8.9 trillion in June 2022, when he began reducing them. On Wednesday, the Fed announced it would reduce its holdings at a slower pace in June and allow a total of $60 billion in bonds to flow each month.

By reducing its holdings, the Fed could help keep long-term rates, including mortgage rates, higher than they otherwise would be. That’s because as it reduces its bond holdings, other buyers will have to buy the securities instead, and rates may have to rise to attract the necessary buyers.

The U.S. economy is in better shape and hiring is higher than most economists expected at this point. The unemployment rate has remained below 4% for more than two years, the longest such streak since the 1960s. And while economic growth has only reached an annual pace of 1.6% during In the first three months of this year, consumer spending has increased at a robust pace, a sign that the economy will continue to grow.

This economic strength has led some Fed officials to speculate that the current level of interest rates may not be high enough to have the cooling effect they need on the economy and inflation. If so, the Fed could even decide to return to rate hikes at some point.