Federal Reserve officials on May 1 held interest rates steady days after a key inflation gauge showed a higher-than-expected increase.
The Federal Open Market Committee kept the federal funds rate unchanged 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 committee in a statement said it does not expect it will be appropriate to reduce rates until it has gained greater confidence that inflation is moving sustainably toward its 2% goal.
Fed Chair Jerome H. Powell reiterated that point at a news conference and said “it is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current range for the federal funds rate for as long as appropriate.”
At its previous meeting in March, committee members projected three rate cuts this year, but economic data since then has come in hot.
The core personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 2.8% year over year in March, unchanged from February but slightly above the expected increase of 2.7%, according to data released April 26 by the Commerce Department.
Similarly, the Bureau of Labor Statistics reported April 10 that the consumer price index rose an annualized 3.5% in March from a year earlier, above expectations, and above the 3.2% figure recorded in February.
The data has dimmed investors’ hopes of a rate cut in the coming months.
Shortly after the May 1 announcement, market participants indicated there was a 90% chance the Fed will again hold rates steady at its next meeting in June and a 73.4% chance it will do so at its July meeting, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.
Powell said the Fed will assess incoming data when making policy decisions. “We know that reducing policy restraint too soon or too much could result in a reversal of the progress we’ve seen on inflation,” he said. “At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth, said in a statement that "inflation data have not cooperated this year, and it is harder to be optimistic about inflation compared to even just a month ago. Today Chair Powell confirmed what the market already believed: The Fed is on hold until inflation data moves lower.”
The Fed also announced that in June it will begin slowing the pace of its balance sheet reductions. The committee said it will lower the monthly redemption cap on Treasury securities to $25 billion from $60 billion but will maintain the monthly redemption cap on agency debt and mortgage-backed securities at $35 billion.
The central bank’s balance sheet is currently $7.5 trillion, down from about $9 trillion when the reduction began in June 2022 to combat inflation.
The committee's decision to maintain rates was unanimous among its 12 members.
The Fed’s next meeting is June 12.
