Federal Reserve continues to hold interest rates at 22-year high

The US Federal Reserve held interest rates steady for another month as the US inflation rate continues to fade from its highest level in a generation.

Policymakers at the central bank, who have signaled they expect to cut rates three times this year, opted to keep rates steady at a 23-year high after their first two-day meeting of 2024.

But they edged closer towards ordering the first rate cut since 2020. In a statement, the Fed said the factors behind its goals for inflation and employment were “moving into better balance”.

It comes as price rises are easing, unemployment remains low and economic growth remains largely resilient, raising hopes that the Fed will guide the world’s largest economy to a so-called “soft landing”, where price growth normalizes and recession is avoided.

Jerome Powell, the Fed chairman, has cautioned that a declaration of victory would be premature. “Inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain,” he told reporters on Wednesday.

The central bank has held rates between 5.25% and 5.5% since July. After this week’s meeting, it said its rate-setting policy 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%”.

It is trying to strike a delicate balance: moving “too soon or too much” on rates could reverse progress on inflation, Powell observed, but “too late and too little” action would risk knocking the economy.

Inflation has weakened. The consumer price index, which peaked above 9% in June 2022, rose by 3.4% in December, according to official data. But many Americans are still grappling with the heightened cost of living, and price growth remains above the Fed’s 2% target.

Fed officials will closely scrutinize employment data for January, due out on Friday. The US economy added 2.7m jobs last year, defying fears of a downturn in the face of the Fed’s aggressive campaign against inflation.

Wall Street came under pressure after Wednesday’s announcement. The S&P 500 slipped 0.8% and the technology-focused Nasdaq Composite fell 1.1%.

At a press conference, Powell noted that “almost every” Fed policymaker believes it will be appropriate to reduce rates later this year.

“We feel like inflation is coming down, growth has been strong, the labor market has been strong,” he said. “What we are trying to do is identify a place where we are really confident about inflation getting back down to 2%, so we can then begin the process of dialing back the restrictive level [of rates].”

The central bank is scheduled to hold its next rate-setting meeting in March. Markets are currently pricing in a 48% chance of a cut, and 51% chance that officials will again sit on their hands, according to CME’s FedWatch tool.