The Federal Reserve said Wednesday it is keeping its benchmark lending rate at its current level for the seventh time in a row, while signaling fewer rate cuts than previously estimated.
That means borrowing costs on everything from car loans to mortgage rates will remain elevated.
Officials penciled in just one rate cut this year, according to their latest economic projections, compared to the three they forecast in March. They also expect inflation to be more stubborn this year than they thought in the spring, according to their forecasts.
Fed Chair Jerome Powell noted that the May Consumer Price Index, released earlier Wednesday, was “certainly a better inflation report than almost anybody expected.” But he said officials still want to see inflation slow further before lowering borrowing costs.
The Fed has kept interest rates at a 23-year high for nearly a year, after kicking off an aggressive rate-hiking campaign in March 2022. Central bankers are waiting for more evidence that inflation is headed toward 2% — and the economy’s resilience is allowing them to be comfortably on hold. The Fed will begin cutting interest rates once it’s clear that inflation has cooled enough and won’t heat back up — or if the job market deteriorates much more than expected, but there are currently not many signs of that.
The inflation situation is now better than it was in the first quarter: Consumer prices eased in May, the Labor Department reported Wednesday morning. From a year earlier, inflation rose 3.3% in May, down from April’s 3.4% rise and also below economists’ expectations.
Fed officials’ latest policy statement noted that inflation has seen some “modest further progress” toward their 2% target in recent months, versus the May statement that noted there had been a “lack” of any improvements.
Here are key takeaways from the Fed’s latest decision on interest rates.
Powell calls May inflation data ‘encouraging’
Not only was the Fed chief pleased with Wednesday’s inflation report, saying it was a “good reading,” but he maintained his view that interest rates are “restrictive” enough to rein in price hikes.
Powell pointed to the substantial progress seen in the second half of last year as an example. Still, he said officials now think “it’s probably going to take longer to get the confidence needed to loosen policy,” compared to what they thought in March. That’s precisely what officials’ forecasts showed.
When asked what will help tug inflation closer to the Fed’s 2% target, Powell said slower inflation will come “from where it’s been coming from,” pointing to the “the unwinding of the pandemic-related distortions to both supply and demand.”
“And that is complemented by, amplified by, supported by restrictive monetary policy, so those two things are working together,” he said. “We’ve made pretty good progress on inflation with our current [policy] stance.”
Economists have said that it’s only a matter of time until declining rents show up in official inflation gauges. Still-high housing costs are still looming large in the CPI: Shelter inflation more than offset the decline in gasoline seen last month, rising 0.4% for the fourth month in a row, the May CPI showed.
No concerns about the job market
Powell has frequently said the job market likely needs to come back “into better balance” to ensure that inflation is on track to 2%. That’s because a labor market that’s running too hot could put some upward pressure on prices, making the Fed’s job of fully defeating inflation more difficult.
The Fed chief says so far so good.
“Overall, a broad set of indicators suggest that conditions in the labor market have returned to about where they stood on the eve of the pandemic, relatively tight but not overheated,” Powell said in his post-meeting press conference on Wednesday afternoon.
He pointed to data proving just that: Job gains averaging 218,000 a month in April and May; unemployment still at low levels, job creation driven by more prime-aged workers and immigrants trickling into the workforce; slower wage growth; and a narrower jobs-to-workers ratio.
The Fed focuses on the job market not just because of its implications on inflation, but also because the central bank is explicitly tasked by Congress to strive toward maximum employment. If the labor market unexpectedly weakens, then that could force the Fed to consider cutting rates, but Powell didn’t sound concerned at all.
“We see gradual cooling, gradual moving toward a better balance,” he said. “We’re monitoring it carefully for signs of something more than that, but we really don’t see that.”
First rate cut in September?
Wall Street’s best bet for the first rate cut is currently September, according to futures, and those odds improved markedly after the release of the May CPI. For that to happen, however, inflation will have to continue to drift lower in the coming months.
Officials frequently emphasize that they are “data dependent” and make conclusions about the economy after data stretching over several months reveal a trend. It’s unclear if the factors that resulted in hotter-than-expected inflation readings earlier this year are still lurking in the background, but the May CPI provided some relief.
“The belief that components boosting inflation in the first quarter were not indicative of current cost pressures needed to be validated. May’s report provides strong evidence on that front,” Matt Colyar, an economist at Moody’s Analytics, said in a note Wednesday. “The Fed is banking it can wait a few more months until inflation falls further.”
The US economy remains on strong footing for now, including the job market as employers continue to hire at a brisk pace. But it’s unmistakable that some US consumers are under pressure. Still-high inflation is continuing to eat into some budgets, pandemic savings are drying up, borrowers continue to pile on more debt and the highest interest rates in nearly a quarter century are squeezing Americans.
