Fed Holds Key Rate At 23-Year High, Maintains Projection for Three Cuts in 2024

Key Takeaways

  • As widely expected, the Federal Reserve held its key interest rate at a 23-year high, keeping upward pressure on borrowing costs for many forms of credit.
  • The Fed has been keeping rates high to force down high inflation, which has fallen significantly over the last two years, but not yet to the Fed’s goal of a 2% annual rate.
  • Fed officials maintained their previous projection of three cuts to the benchmark federal funds rate by the end of the year.
  • Financial market participants are betting the Fed will begin cutting the rate at its June meeting.

High inflation is proving stickier than expected, and the Federal Reserve’s high interest rates in response are also staying higher longer than financial markets once hoped. 

The Federal Open Market Committee (FOMC), the body that sets the central bank’s monetary policy, on Wednesday made official what markets had come to expect in recent weeks and held the fed funds rate at a range of 5.25-5.50%. That’s the highest since 2001 and where it’s been since July. The FOMC has kept it at that level for the five meetings it’s held since then. 

Late last year, traders had predicted the Fed cut rates in the spring, but since then, inflation has stayed unexpectedly stubborn. Fed officials said they won’t cut the fed funds rate until they are confident enough that inflation is solidly on its way down to 2% annually. Reducing the fed funds rate would relieve pressure put on household budgets by interest rates on mortgages, car loans, and all kinds of other credit, which are at or near their highest in decades. 

“The 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 percent” the FOMC said in a statement using language identical to its previous statement in January.

The FOMC also released economic projections showing that policymakers are still expecting to cut the fed funds rate by three-quarters of a percentage point by the end of the year, unchanged from the last time they made projections in December.

That outlook for rate cuts this year didn’t change despite hotter than expected inflation reports in January and February. At a post-announcement press conference, Fed chair Jerome Powell said that while he wasn’t dismissing those reports, they didn’t alter the big picture.

“I think they haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%,” he said. “I don’t think that story has changed. I also don’t think that those readings added to anyone’s confidence that we’re moving closer to that point.”

Powell noted that the Fed hadn’t shifted its outlook too much when earlier reports had come in better than expected. 

“We’re not going to overreact as well to these two months of data, nor are we going to ignore them,” he said. 

Economic Growth Forecasts Raised

In the longer run, the latest round of projections forecast an economy running a little hotter, and rates staying higher, than previously thought. The committee projected the fed funds rate only falling to range of 3.75%-4% by the end of 2025, a quarter-point higher than their previous estimate. The FOMC members also upwardly revised their estimates for how fast the economy will grow, with a 2.1% increase in gross domestic product seen this year, up from 1.4% in their December projections.

High interest rates, which push up borrowing costs for just about everything in the economy, are meant to discourage borrowing and spending and give supply and demand a chance to rebalance so inflation cools. They also risk slowing the economy so much it falls into a recession, and put their own kind of pressure on household finances. 

Measures of housing costs, which heavily influence the overall inflation rate, have run hotter than expected. The cost of living rose 3.2% over the last year as measured by the Consumer Price Index, down from its peak of a 9.1% annual inflation rate in July 2022, but still too hot for the Fed’s liking. However, data on rent from private sector sources suggests that those official housing cost measures will fall throughout the year, pushing the overall inflation rate down.

Not only are rent pressures easing, but recent reports have also shown consumers are cutting back on spending and employers are offering lower raises as those high interest rates drag down the economy, fueling speculation about rate cuts later in the year. 

“Economic resiliency and inflation stubbornness are chipping away at the Fed’s appetite for easing, but not enough to derail rate cuts later this year,” Michael Gregory, deputy chief economist at BMO Capital Markets, said in a commentary. “However, timing is still very much in the air.”

By the end of Powell’s press conference, markets were pricing in a 74% chance the Fed would begin to cut interest rates in June, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That compares with the 65% likelihood of a cut priced in just before the Fed’s release.

Meanwhile, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite all closed at record highs Wednesday as investors welcomed the news that the Fed remains on track for a series of rate cuts this year.

UPDATE: This article has been updated to add detail on the FOMC’s economic projections, quotes from the post-announcement press conference, commentary from an economist, market reaction to the FOMC news and a photo from Wednesday’s press conference.

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