Fed not cutting interest rates, inflation remains at 23-year high

The central bank said that economic activity had continued to expand ‘at a solid pace’ but there had been a ‘lack of further progress’ towards its inflation objective

The Federal Reserve has announced that it will not be cutting interest rates until it has “greater confidence” that price increases are slowing, as inflation in the US remains at a 23-year-high.

In a statement, released on Wednesday, the Fed said that economic activity had continued to expand “at a solid pace” but there had been a “lack of further progress” towards its 2 per cent inflation objective.

“Job gains have remained strong, and the unemployment rate has remained low,” the statement read. “Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”

Following its latest committee meeting, led by Chair Jerome Powell, the central bank decided that its key interest rate would remain unchanged at between 5.25 per cent and 5.5 per cent — the highest level in more than a decade.

Markets had expected the decision and US stocks held relatively steady on Wednesday following the announcement.

Markets had expected the decision and US stocks held relatively steady on Wednesday following the announcement (AP)

By keeping interest rates high, it is hoped that inflation will slow. By making it more expensive for businesses and consumers to borrow money, it is hoped that demand for goods and services will be reduced, thereby reducing price growth.

According to the Associated Press, the Fed’s belief that inflation was easing has been undercut by several unexpected reports on prices and economic growth.

High interest rates and persistent inflation have also emerged as a potential threat to President Joe Biden’s re-election bid. Many Americans have expressed discontent with the economy, notably over the pace of price increases.

Despite this, according to economists, the US economy is currently healthier than many thought it would be.

The unemployment rate has remained below 4 per cent for more than two years, the longest such streak since the 1960s, and in the first three months of this year, consumer spending grew at a robust pace, indicating that the economy will keep expanding.

The Fed’s statement on Wednesday reflects an abrupt shift in its timetable on interest rates. As recently as their last meeting on 20 March, policymakers had projected three rate reductions in 2024, likely starting in June.

High interest rates and persistent inflation has also emerged as a potential threat to President Joe Biden’s re-election bid (AP)

But given the persistence of elevated inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.

The Fed’s cautious outlook stems from three months of data that pointed to chronic inflation pressures and robust consumer spending. Inflation has cooled from a peak of 7.1 per cent, according to the Fed’s preferred measure, to 2.7 per cent, as supply chains have eased and the cost of some goods has actually declined.

However, average prices remain well above their pre-pandemic levels, and the costs of services, including apartment rents, health care, restaurant meals and auto insurance continue to rise drastically.

On Wednesday, the Fed also said it would slow the pace at which it’s unwinding one of its biggest Covid-era policies: Its purchase of several trillion dollars in Treasury securities and mortgage-backed bonds.

The policy is an attempt to stabilise financial markets and keep longer-term rates low.

The Associated Press contributed to this report.