Washington
CNN
—
The Federal Reserve said Wednesday it is keeping its benchmark lending rates at their current levels for the seventh time in a row, while signaling fewer rate cuts than previously estimated.
That means borrowing costs on everything from car loans to mortgages will remain elevated.
Officials penciled in just one rate cut this year, according to their latest economic projections, compared to the three they forecast in March. They also expect inflation to be more stubborn this year than they thought in the spring, according to their forecasts.
The Fed has kept interest rates at a 23-year high for nearly a year, after kicking off an aggressive rate-hiking campaign in March 2022. Central bankers are waiting for more evidence that inflation is headed toward 2% — and the economy’s resilience is allowing them to be comfortably on hold. The Fed will begin cutting interest rates once it’s clear that inflation has cooled enough and won’t heat back up — or if the job market deteriorates much more than expected, but there are currently not many signs of that.
Hopes for rate cuts got a boost Wednesday morning: Consumer price pressures eased in May on an annual basis. From a year earlier, inflation rose 3.3% in May, down from April’s 3.4% rise and also below expectations.
Fed officials’ latest policy statement noted that inflation has seen some “modest further progress” toward their 2% target in recent months, versus the May statement that noted there had been a “lack” of any improvements.
Wall Street’s best bet for the first rate cut is currently September, according to futures, and those odds improved markedly after the release of the May CPI. For that to happen, however, inflation will have to continue to drift lower in the coming months.
Officials frequently emphasize that they are “data dependent” and make conclusions about the economy after data stretching over several months reveal a trend. It’s unclear if the factors that resulted in hotter-than-expected inflation readings earlier this year are still lurking in the background, but the May CPI provided some relief.
The belief that components boosting inflation in the first quarter were not indicative of current cost pressures needed to be validated. May’s report provides strong evidence on that front,” Matt Colyar, an economist at Moody’s Analytics, said in a note Wednesday. “The Fed is banking it can wait a few more months until inflation falls further.”
Fed Chair Jerome Powell has maintained his view that the central bank will likely lower borrowing costs sometime this year, even after the earlier spate of disappointing inflation reports. He frequently notes that the road to 2% will be a bumpy one and that the Fed’s posture of holding steady, made easier by a strong economy, is currently their best strategy as they wait for high interest rates to take deeper hold.
The US economy remains on strong footing for now, including the job market as employers continue to hire at a brisk pace. But it’s unmistakable that some US consumers are under pressure. Still-high inflation is continuing to eat into some budgets, pandemic savings are drying up, borrowers continue to pile on more debt and the highest interest rates in nearly a quarter century are squeezing Americans.
This story is developing and will be updated.
