Fed holds rates steady, flags ‘lack of further progress’ on inflation

WASHINGTON: The US Federal Reserve held interest rates steady on Wednesday and signaled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.

The Fed's latest policy statement, issued at the end of a two-day meeting, kept key elements of its economic assessment and policy guidance intact, noting that "inflation has eased" over the past year, and framing its discussion of interest rates around the conditions under which borrowing costs can be lowered.

"The (Federal Open Market Committee) does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 percent," the Fed repeated in a unanimously-approved statement that still indicated the next move on rates will be down.

That continues to leave the timing of any rate cut in doubt, and Fed officials made emphatic their concern that the first months of 2024 have done little to build the confidence they seek in falling inflation.

"In recent months, there has been a lack of further progress towards the Committee's 2 percent inflation objective," the Fed said in the statement. Where the prior statement in March suggested an improving dynamic, saying that the risks to the economy "are moving into better balance," the new statement hinted that the process may have stalled with its assessment that risks "have moved toward better balance over the past year."

The U.S. central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly.

The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed's last round of "quantitative tightening."

While the move could loosen financial conditions at the margin at a time when the U.S. central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.

The benchmark policy rate has been held in the current 5.25 percent-5.50 percent range since July. Rate cuts had been anticipated as early as March of this year, but have been pushed back as incoming inflation data showed that progress towards the 2 percent target had stalled. The personal consumption expenditures price index, which is the Fed's preferred inflation gauge, increased 2.7% in March on a year-over-year basis.