Federal Reserve leaves interest rates unchanged, tempers expectations on rate cuts ahead

The Federal Reserve maintained its benchmark interest rate on Wednesday in a range of 5.25%-5.50%, the highest since 2001, and cautioned it won’t begin lowering interest rates until it sees further progress on inflation returning to its 2% target.

“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%,” the Fed said in its policy statement.

Officials say they are still “highly attentive” to inflation risks.

Fed officials noted that the risks to achieving price stability and maintaining full employment are “moving into better balance.” The Fed characterized job gains as having “moderated” over the last year but noted that job gains remain “strong.”

The central bank also changed language from prior statements that had previously left room for rate hikes.

On Wednesday, the Fed more broadly referred to “any adjustments” it may need to make to its interest rate policy in the future.

The Fed had, in prior statements, made reference to the potential need for “any additional policy firming” should inflation not continue moving towards its goal.

Following the Fed’s announcement on Wednesday, data from the CME Group showed markets pricing in a roughly 55% chance that the Fed begins lowering interest rates in March; as of Tuesday, this measure had suggested the odds of rate cuts beginning in March were closer to 40%.

In a nod to stronger-than-expected fourth quarter GDP, officials characterized the economy as “expanding at a solid pace.” Still, they noted that the economic outlook is uncertain.

The Fed also removed language qualifying the US banking system as sound and resilient while also stripping out any talk of how tighter financial and credit conditions would weigh on households.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Federal Reserve Board chair Jerome Powell. (Photo by Win McNamee/Getty Images) (Win McNamee via Getty Images)

Officials last raised rates in July 2023 and expect to cut rates sometime this year, with the median expecting three rate cuts.

Inflation, which the Fed is trying to cool, continues to drop closer to the central bank’s 2% target.

The Fed’s favored inflation measure — the core Personal Consumption Expenditures index, which excludes volatile food and energy prices — clocked in at 2.9% for the month of December, down from 3.7% in September and 4.3% in June. This marked the measure’s lowest reading since March 2021.

Even more encouraging was that core PCE inflation fell to 1.5% on a three-month annualized basis, its lowest since late 2020. On a six-month basis, core PCE stood at 1.9% for the second month in a row. The Consumer Price Index on a core basis showed inflation rose 3.9% in December.

Separately, on Wednesday, the FOMC implemented recommendations proposed last year to increase the amount of staff covered by restrictions on investment and trading activities and will tighten restrictions on all staff with access to confidential FOMC information.

Existing policy already prohibits senior Fed officials involved with monetary policy decisions from buying individual stocks or sector funds, or from holding investments in individual bonds, crypto, or derivatives. The new restrictions are effective June 30.

Fed officials Wednesday also reaffirmed their longer-run goals and strategic approach to setting monetary policy adopted in August 2020.

Wednesday’s decision was unanimous.

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