U.S. Federal Reserve holds interest rate, saying it will take ‘longer than expected’ to start cutting

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The U.S. Federal Reserve held interest rates steady on Wednesday and signaled it is still leaning toward eventual reductions in borrowing costs, but that cuts could be delayed as recent inflation numbers have strayed further from its two per cent target.

Indeed, Fed Chair Jerome Powell said it was likely to take longer than previously expected for Fed officials to be confident that inflation is under control. 

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. In discussing interest rates, it outlined the economic conditions needed in order for borrowing costs to be lowered.

U.S. stocks cut some losses following the release of the policy statement while the U.S. dollar fell against a basket of currencies.

Investors are now betting that the U.S. central bank will start cutting rates in November and that it will deliver at least one reduction in borrowing costs this year.

“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 two per cent,” the Fed repeated in a unanimously-approved statement that still indicated the next move on rates will be down.

“Inflation is still too high,” Powell said in a press conference after the meeting. “Further progress in bring it down is not assured and the path forward is uncertain.”

“It is likely that gaining greater confidence will take longer than previously expected,” Powell said.

Timing of a first rate cut in doubt

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 two per cent inflation objective,” the Fed said in its statement.

“Assuming it’s going to take at least three months of good inflation performance to potentially turn [the bank’s rhetoric] around, this means the Fed has moved further away from cutting rates any time soon,” wrote BMO deputy chief economist Michael Gregory in a note.

WATCH | Bank of Canada won’t speculate on cutting interest rates: 

Bank of Canada won’t speculate about cutting interest rates

The Bank of Canada is holding its key interest rate at 5 per cent, saying it needs to see sustained slowing of inflation before it will cut the rate. It is not ruling out a June cut.

Some economists are expecting that the U.S. and Canada will diverge further on monetary policy than previously thought.

While the U.S. economy has so far expanded at a solid pace, Canada missed GDP expectations earlier this week, signalling a loss in momentum after a strong start to the year. That reinforced some analysts’ view that the Bank of Canada would move forward on rate cuts during its next meeting in June. 

“We expect a growing gap between policy rates in Canada and the U.S., as weakening growth and inflation numbers prompt the [Bank of Canada] to cut rates before the Fed and at a more aggressive pace after,” wrote RBC economists Nathan Janzen and Claire Fan in a note last month.

Fed’s preferred inflation measure rose 2.7% in March

The Fed also announced that it would slow the pace at which it’s unwinding one of its biggest COVID-era policies: the purchase of several trillion dollars in Treasury securities and mortgage-backed bonds, an effort to stabilize financial markets and keep longer-term rates low.

The Fed is now allowing $95 billion US of those securities to mature each month, without replacing them. Its holdings have fallen to about $7.4 trillion, down from $8.9 trillion in June 2022, when it began reducing them. On Wednesday, the Fed said it would, in June, reduce its holdings at a slower pace, and allow a total of $60 billion of bonds to run off each month.

The benchmark policy rate has been held in the current 5.25 to 5.50 per cent 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 toward the two per cent target had stalled. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, increased 2.7 per cent in March on a year-over-year basis.

“Inflation remains elevated,” the Fed’s policy statement said. Many analysts feel that the Fed will signal an initial rate cut once it removes that oft-repeated phrase from its statement.

The statement maintained its overall assessment of economic growth, saying that the economy “continued to expand at a solid pace. Job gains have remained strong and the unemployment rate has remained low.”

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