The US Federal Reserve has left interest rates on hold for the fifth consecutive meeting as policymakers look for “greater confidence” inflation is decisively on its way back down to two per cent.
The decision means the federal funds rate will remain at a 23-year high, standing in a range of 5.25 to 5.50 per cent.
In a statement the rate-setting Federal Open Market Committee (FOMC) said: “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 two per cent.”
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The Fed said that economic activity remained solid while the labour market was strong. “Inflation has eased over the past year but remains elevated,” it said.
“The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,” the statement added.
The decision comes as markets grow increasingly nervy about the persistence of inflation. Having fallen rapidly from a peak of over nine per cent, consumer prices have overshot expectations for two consecutive months at the start of 2024.
In February, prices rose 0.4 per cent month-on-month, meaning the headline rate of inflation picked up to 3.2 per cent.
Looking longer term, there has been little progress on inflation since last summer, when inflation dropped to three per cent.
The core personal consumption expenditure (PCE) index, the Fed’s preferred measure of inflation, also rose in January with prices climbing 0.4 per cent.
Stubborn inflation and hawkish commentary from policymakers has dampened market bets on rate cuts. At the turn of this year, markets thought it was very likely rates would be reduced in March but now investors think rate cuts will begin in the summer.
There is a 59 per cent chance that the Fed will cut in June, according to CME’s Fedwatch tool.
Policymakers can afford to wait a little longer to ensure inflation is decisively under control before cutting rates given the strength of the US economy. The world’s largest economy grew 2.5 per cent last year, accelerating from its 2022 performance.
The Fed’s decision comes ahead of the latest rate announcement from the Bank of England tomorrow. Interest rates are likely to be left on hold, with investors also only expecting rate cuts to begin in the summer.