Topline
The Federal Reserve announced Wednesday it will keep interest rates at a 23-year high, after a spate of worse-than-forecasted inflation data evaporated hopes for a sizable pivot in monetary policy this year.
Federal Reserve Chairman Jerome Powell has overseen the most notable tightening cycle in decades.
Key Facts
The Federal Open Markets Committee said Wednesday its participants opted to hold the target federal funds rate steady at 5.25% to 5.5%, maintaining the highest interest rates since 2001.
It’s the central bank’s policy-determining panel’s sixth consecutive meeting keeping rates firm, dating back to last summer.
The Fed’s brief announcement noted “there has been a lack of further progress toward” its 2% inflation goal, nodding to the sticky price increases which tilted market expectations for rate cuts, adding it doesn’t anticipate cutting rates until “it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
Though a hold was widely expected—traders priced in 99% probability of a hold, according to the CME FedWatch Tool—it represents a massive shift in market expectations for monetary policy.
The same market-implied odds of a hold by Wednesday’s meeting stood at 0% as recently as mid-January, with the 180-degree shift coming as monthly inflation data revealed progress stalled toward the level the Fed wants to see to loosen its belt.
In a Wednesday press conference, Fed chairman Jerome Powell conceded it’s “unlikely” the Fed will hike rates further, jolting markets, with the Dow Jones Industrial Average tacking on more than 400 points shortly after his comments.
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What We Don’t Know
What the Fed will do next. Despite the sticky inflation and strong economic growth, investors and economists alike consider it highly improbable the Fed will return to rate increases any time soon. “It would probably take either a serious global supply shock or very inflationary policy shocks for rate hikes to become realistic again,” Goldman Sachs’ chief U.S. economist David Mericle wrote ahead of the latest Fed meeting, noting the recent uptick in inflation data exhibit “no signs of genuine reheating” and is rather a matter of transitory tailwinds. Futures contracts indicate 25 basis points of cuts to a target range of 5% to 5.25% is the most likely scenario by year’s end, a far cry from the 175 basis points of 2024 cuts priced in at the beginning of the year. The Fed itself most recently indicated it expects rates to settle at 4.6% by the end of 2024, 3.9% by the end of 2025 and 2.6% in the long run, according to median quarterly Fed staff projections released in March,
Key Background
The target federal funds rate only officially determines the interest paid on overnight transactions between financial institutions, but borrowing rates of all forms tend to closely follow the Fed-determined range, impacting the costs of everything from mortgages to government debt and corporate loans. Lower interest rates tend to spark economic growth, while higher rates tend to do the opposite, and central banks typically hike rates to slow inflation in an effort to maintain the value of their home currencies. Bonds and stocks alike typically lose value in higher-rate environments, as existing bonds bought at lower yields become less appealing than their newer-issued counterparts and stocks decline as investors often opt for the higher, guaranteed returns of instruments like money-market funds and corporations’ earnings power declines. After keeping rates close to zero for two years to stimulate the economy during the early days of the pandemic, the Fed hiked rates by more than 500 basis points from March 2022 to July 2023, owing to inflation climbing to its highest level since the early 1980s. After the S&P cratered 25% through the first nine months of 2022, stocks proved remarkably resilient in the new regime, as all three major indexes set fresh all-time highs earlier this spring. However, stocks have slid and yields have climbed in recent weeks as inflation came in above economist forecasts for the fifth straight month, with the S&P posting its first losing month since October last month.
