Fed leaves interest rates at 22-year high but pushes back on rate cuts

The US Federal Reserve has left interest rates on hold for the fourth consecutive meeting with policymakers suggesting they need “greater confidence” inflation is falling to target before rates can be lowered.

The decision means the federal funds rate will remain at a 22-year high, standing in a range of 5.25 to 5.50 per cent.

Although the rate-setting Federal Open Market Committee (FOMC) dropped any reference to hiking rates further, it suggested markets would have to wait a little longer until rates would be lowered.

In a statement, the 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”.

“The Committee is strongly committed to returning inflation to its two per cent objective,” it added.

Over the past couple of years the Fed has embarked on its aggressive monetary tightening campaign in decades as it sought to quell rampant inflation.

Having peaked at over nine per cent last summer, the most recent consumer price data from the US showed that the headline CPI index ended 2023 at 3.4 per cent.

The Fed’s preferred measure of inflation, core personal consumption expenditure (PCE) inflation, now stands at 2.9 per cent. When looking over the last six months, core PCE inflation is actually below the two per cent target, coming in at 1.6 per cent.

Falling inflation has fuelled bets that the Fed will start lowering interest rates soon. According to CME’s Fedwatch, there is a near 60 per cent chance that the Fed will start lowering rates in its March meeting.

The Fed, like central banks all over the world, has been eager to push back against markets’ optimism. It said that it would be guided by the data over the coming months.

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the FOMC said.

Despite the Fed’s rate hikes, the US economy remains remarkably strong. Recent figures showed that the US economy grew 2.5 per cent across 2023, an acceleration on 2022 and far stronger than European counterparts.

The Fed’s decision follows the European Central Bank’s decision to leave rates on hold last week. The Bank of England will announce their decision tomorrow, with markets expecting rates will be left on hold.