Fed stands pat as “progress” on US inflation stalled

Fed leaves rates unchanged, admits stalling progress on US inflation

On Wednesday, the Federal Reserve's policy committee opted to maintain the benchmark interest rate unchanged, holding it at the current target range of 5.25%-5.50%, despite three months of unexpectedly high US inflation.

This decision, made at the end of the committee's routine two-day meeting, was widely expected by markets. The Federal Open Market Committee (FOMC) has not adjusted interest rates since a hike in July 2023.

“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’s statement reiterated on Wednesday.

During its March session, the FOMC projected three potential rate cuts of a quarter of a percentage point each for 2024. However, Federal Reserve officials have stated that more evidence of progress in managing inflation is required before they can confidently proceed with the cuts.

U.S. stocks finished mostly lower after the Fed meeting, with the S&P 500 and Nasdaq dipping by 0.34% and 0.33% respectively, while the Dow ticked up 0.23%.

The U.S. dollar index (DXY), a gauge of the greenback’s strength against six major currencies, dropped sharply in response to the announcement, sliding from a 6-month high hit earlier in the session. At the time of writing on May 2, DXY last traded flat at 0.03%.

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Powell says rate cut forecast is cloudy

With inflation rates coming in higher than expected in the first quarter and the year advancing into May, doubts are emerging about the feasibility of implementing all three proposed cuts within this calendar year. The last US inflation print came in at 3.5% year-on-year in March — above forecasts of 3.5%.

Responding to questions about the timing of these cuts, Fed Chair Jerome Powell appeared reluctant to commit to a specific timeline, stressing a cautious approach to monetary policy adjustments.

“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’s statement reiterated on Wednesday.

“My colleagues and I today said that we didn't see progress [on inflation] in the first quarter, and I've said that it appears then that it's going to take longer for us to reach that point”, Powell said, admitting that he doesn’t know how long it will take.

Powell added that he felt it was “appropriate to reserve judgment” on interest rate cuts until there was a full quarter of economic data — Q1, however, didn’t appear helpful in building confidence.

“I can just say that when we get that confidence, then rate cuts will be in scope. And I don't know exactly when that will be,” the Fed chair said.

Powell added that he remains optimistic, noting his expectation is that US inflation will move back down over the course of the year: “That's my forecast”.

Markets continue to price in autumn rate cuts

Following Federal Reserve Chair Jerome Powell's press conference on Wednesday, expectations for Fed cuts this year only slightly adjusted, indicating that market sentiment had largely been in line with the bank’s thinking.

Interest-rate futures revealed modestly improved probabilities for rate cuts in September and November. According to the CME FedWatch Tool, there is now a 42.4% chance that the first interest rate cut will occur during the Fed's September meeting.

The CME FedWatch Tool also showed slim chances of any rate cuts throughout the year.

Jack McIntyre, a portfolio manager at Brandywine Global, was quoted by Barron’s as saying a "collective sigh of relief in the financial markets" was felt due to the Fed's decision not to escalate its hawkish stance.

Daniel Murray, deputy chief investment officer and global head of research at EFG Asset Management, told Barron’s:

“In interpreting the statement in the context of recent macro releases, it is clear that the future path of Fed policy has become more uncertain. Futures are now pricing only slightly more than one rate cut this year. While it is not the central view, there is clearly also an increased probability that the Fed has to hike again”.

That scenario would likely play out if the labor market continues to show strength and inflation remains stubbornly higher than the Federal Reserve’s 2% target.

The U.S. central bank appears to be on diverging trajectories with its peers across the globe, with the Bank of England and the European Central Bank both eyeing interest rate cuts as soon as June this year.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.