The Federal Reserve (Fed) is facing stubborn inflation, which has stalled, raising concerns about where US central bank policy is headed.
The Fed is stuck maintaining a guideline that is the same as reflected this Wednesday, when the two days of meeting concluded. It kept interest rates unchanged at 5.21% to 5.50%, the highest level in two decades, where it has been stuck since July 2023, while uncertainty remains about when it will start cutting interest rates.
Investors, apparently, received yet another bad news, especially as there was a setback in the fight against inflation. However, the Dow Jones index shot up.
In the conclusions, the governors of the central bank unanimously point out “the lack of progress” in the control of price increases in recent months, which, after falling, have risen again, even more than I expected.
“Inflation has decreased in the last year, but remains very high”, they insisted.
In the statement, they pointed out that this restrictive policy will be maintained until they “have full confidence” that inflation will move towards 2%, the goal set by the Fed.
This comment was discouraging, because it was inferred that the finish line is further away now than it was a while ago. By the end of 2023, he was betting on up to seven reductions. Now there are doubts and it seems that it is accepted that the bets for the beginning of the cuts at the June or July meetings are starting to be delayed to September. “Let’s go from one meeting to another,” stressed Jerome Powell, president of the Fed, at the press conference held when the governors’ meeting ended. He did not venture to set a timetable.
The previous words were confirmed that “we need great confidence that inflation is going towards a sustained 2% and until then this policy will be appropriate”, he reiterated in his appearance.
There was even a question in which it was raised whether, given the stubbornness of inflation, instead of lowering it, they could increase the price of money. “It is unlikely that the next move in interest rates will be an increase,” he said. This response is what led to the rise of the Dow Jones, while injecting reassurance that this will not get worse. Powell’s key word was “calm”.
He insisted that “considerable economic progress has been made”, the labor market remains strong, consumption remains very robust, despite high interest rates, and they are well prepared to face different scenarios.
He pointed out, however, that “inflation is still very high and future progress to reduce it is not guaranteed”. Aware of the danger of excessively extending restrictions and also of the risk of easing them prematurely, Powell remarked that they are “willing to keep rates high for as long as necessary”. But he guaranteed that they do not foresee inflation at the skyrocketing level of two years ago.
