With inflation still stubbornly above their target, Federal Reserve officials on March 20 left interest rates unchanged for the fifth consecutive meeting, though signaled three rates cuts later this year.
The Federal Open Market Committee held the federal funds rate steady at a range of 5.25% to 5.5% following its two-day meeting. Since March 2022, the Fed has raised the funds rate, which is now at its highest level since 2001, 525 basis points, though rates have been at the current level since July.
The decision before the Fed is now when it should begin cutting rates.
“We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Fed Chair Jerome H. Powell said at a March 20 news conference. “The economic outlook is uncertain, however, and we remain highly attentive to inflation risks.”
Powell reiterated a point he has made in recent months: that the Fed is prepared to keep rates at their current level if the incoming data warrants. Also reducing policy restraint too soon or too much could result in a reversal of progress made in the Fed's fight against high inflation and ultimately require even tighter policy to get inflation back to its 2% objective, he added.
The committee's median projection for the federal funds rate at the end of 2024 is now 4.6%, the same figure as December, and 3.9% at the end of 2025, also the same figure projected in December.
In a statement, the committee said it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward" the Fed's 2% inflation target.
But incoming data shows inflation hovering slightly above 3% in recent months. The Bureau of Labor Statistics reported on March 12 that the consumer price index rose an annualized 3.2% from a year ago in February, above expectations, and also slightly above the 3.1% figure recorded in January.
Separately, the core personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 2.8% year over year in January, and down slightly from the 2.9% year over year rise in December, according to data released Feb. 29.
All the while, the unemployment rate has edged up to 3.9%, though remains low historically, and the U.S. gross domestic product increased at an annual rate of 3.2% in the fourth quarter, exceeding expectations.
The committee's median projection for PCE inflation by the end of 2024 is now 2.6%, up slightly from 2.4% in December. The committee sees PCE inflation decreasing to 2.2% by the end of 2025 and to 2% by the end of 2026.
Also, the committee expects the unemployment rate to hold steady around 4% through 2026, and projects on a median basis GDP to increase 1.4% in 2024, 1.8% in 2025 and 1.9% in 2026.
Shortly after the March 20 announcement, market participants indicated there was a 5.3% probability that the Fed will initiate a quarter-point rate cut at its next meeting in May and a 63.6% chance it will do so at its June meeting, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.
“Overall, despite recent bumps in the inflation road, major central banks remain on track for rate cuts in the coming months and high-quality fixed income bonds stand to benefit,” said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions within Goldman Sachs Asset Management, in a statement.
The committee's decision to maintain rates was unanimous among its 12 members.
The Fed's next meeting is April 30-May 1.
