Fed declines to cut rates as inflation, consumer confidence improve

The Federal Reserve held interest rates steady Wednesday following its first monetary policy meeting of the year.

The Federal Open Market Committe (FOMC) kept its baseline interest rate range at 5.25 to 5.5 percent after several months of strong economic data and slowing inflation.

“We want to see more good data. It’s not that we’re looking for better data,” Fed Chair Jerome Powell said during a press conference.

“We need to see more evidence that sort of confirms what we think we’re seeing.”

The FOMC, the central bank panel responsible for setting monetary policy, said it was holding off on rate cuts “until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

While the FOMC said it was watching “a wide range of information,” the committee singled out conditions in the labor market, inflation expectations, and “financial and international developments.”

The Fed’s more cautious stance appeared to spook financial markets, pushing all three major stock indexes into losses. The S&P 500 index was down 1 percent and the Nasdaq composite was down 1.6 percent shortly before Powell’s press conference.

“The Fed is certainly pushing back on the notion of a March interest rate cut, dashing investors’ hopes again, but keeping options open and remaining non-committal as a central bank does,” said Greg McBride, chief financial analyst at Bankrate.

“Interest rates took the elevator going up but are going to take the stairs coming down.”

Top Fed officials ended 2023 signaling that rate cuts were coming this year as long as inflation continues to fall. Inflation clocked in at 3.4 percent in December, according to the latest consumer price index (CPI), down significantly from its 9 percent peak in June 2022. 

GDP growth and the job market have remained strong despite widespread predictions of a recession a year ago, although a series of high-profile layoffs this month could throw a wrench in the Fed’s forecasted “soft landing.” 

Brian Coulton, Fitch Ratings chief economist, suggested the note of caution was “clearly some pushback here against growing market expectations of imminent rate cuts.”

“The Fed sounds quite cautious about prematurely reaching the conclusion that inflation is moving back to 2% on a sustainable basis and wants more time to assess the evidence. With scant evidence of a slowdown in growth, a still tight labor market and elevated wage and services inflation, we don’t see rate cuts until June or July,” Coulton predicted.

Private American companies added 107,000 new jobs in January, according to the latest report released by ADP, far below the 150,000 economists polled by the Wall Street Journal predicted. The Labor Department will release the January jobs report on Friday.

But consumers are also more optimistic about the state of the U.S. economy than they have been in the past two years, according to surveys by consulting and polling company Gallup and the business research nonprofit The Conference Board released this week.

That could be good news for President Biden, who has been trying to sell his economic platform to voters as his reelection campaign heats up. The Fed’s decision on how and when to cut interest rates is totally independent of politics, but the timing has nevertheless opened Powell and the central bank up to partisan pressure.

In a letter to Powell on Sunday, Sens. Elizabeth Warren (D-Mass.), John Hickenlooper (D-Colo.), Jacky Rosen (D-Nev.) and Sheldon Whitehouse (D-R.I.) urged the Fed to cut interest rates that they say have “aggravated the country’s persistent crisis of housing access and affordability.”

“As the Fed weighs its next steps in the new year, we urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many,” the senators wrote.

Updated at 2:40 p.m.

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