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.
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…
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