Federal Reserve signals that rates will remain higher for longer

Federal Reserve Board Chair Jerome Powell. Photo / Alex Brandon, File

The Federal Reserve has signalled that a series of disappointing inflation readings are likely to mean US borrowing costs remain higher for longer, as it held interest rates at a 23-year high and unveiled plans to slow the pace of its quantitative tightening programme.

The Federal Open Market Committee said after the meeting on Wednesday that there had been “a lack of further progress” towards its 2 per cent goal in recent months — an addition to its statement that in effect delays rate cuts until the second half of this year at the earliest.

However, the FOMC also indicated that it was not yet concerned enough by the recent uptick in inflation to consider rate rises, confirming that the risks to achieving its joint goals of full employment and subdued price pressures had “moved towards better balance over the past year”.

The Fed held its benchmark interest rate at 5.25 per cent to 5.5 per cent — where it has been since the summer of 2023.

It also announced that it would reduce the cap on the amount of US Treasury bonds it allows to mature each month, without buying them back, from $60 billion to $25b, beginning in June. It would still allow up to $35b in mortgage-backed securities to roll off the balance sheet.

Any principal payments in excess of the $35b cap would also be reinvested in Treasuries.

US rate-setters had hoped to cut interest rates three times this year, but higher-than-expected inflation in recent months has raised the prospect that the Fed will keep borrowing costs at current levels for the duration of 2024.

Ahead of the meeting, traders in the futures market were betting on between on and two cuts this year, with the first reduction not fully priced in until December.

Fed chair Jay Powell is set to meet the press at 2.30pm local time (6.30am NZT) to explain the Fed’s thinking on price pressures.

The initial market response to the statement was muted, with Treasury bond yields slightly lower following the release and stocks slightly higher.

The Fed’s meeting, just over six months before the US presidential election in November, comes as voters continue to cite inflation and the high cost of living as among their most pressing concerns.

President Joe Biden said on the campaign trail last month that he could not “guarantee” cheaper borrowing costs but he “expected those rates to come down” this year.

But the latest federal data on prices showed that the Fed’s speedy progress in lowering inflation last year has stalled.

The headline personal consumption expenditures measure, upon which the Fed’s 2 per cent goal is based, edged up in March — to 2.7 per cent, from 2.5 per cent in the year to February.

Rate-setters’ preferred gauge of underlying price pressures, core PCE, which strips out volatile food and energy prices, was unchanged in March at 2.8 per cent.

While the progress on inflation has stalled, economic growth has also fallen back, with gross domestic product dropping in the most recent quarter to an annualised rate of 1.6 per cent, down from 3.4 per cent in the fourth quarter of 2023.

Analysts have also warned that turmoil in the Middle East could push oil prices higher, adding to inflation for other goods.

The rise in inflation in March was largely due to a jump in petrol costs in the US, prompting some analysts to warn about the prospect of “stagflation” if energy prices continued to rise while economic growth cooled.

Written by: Claire Jones in Washington and Kate Duguid in New York

© Financial Times