US Fed to hold rates at 23-year high-mark until inflation cools, slows pace of balance sheet runoff: 5 key highlights

  • The US central bank has maintained its key overnight interest rate at the 23-year high mark since July 2023, and intends to hold steady until inflation cools to target level

Nikita Prasad
Updated2 May 2024
(FILES) This file photo shows the US Federal Reserve in Washington, DC. AFP PHOTO/Karen BLEIER/FILES
(FILES) This file photo shows the US Federal Reserve in Washington, DC. AFP PHOTO/Karen BLEIER/FILES

The US Federal Reserve announced its third interest rate decision for 2024 today (May 1), after a two-day Federal Open Market Committee (FOMC) meeting, where it unanimously voted to leave the key benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent for the sixth straight meeting, which was broadly in line with Wall Street estimates and market analysts.

The US central bank has maintained its key overnight interest rate at the 23-year high mark since July 2023, and has now indicated of holding rates high until inflation cools and moves consistently to the target range. Fed policymakers also slightly raised the US core inflation and US GDP growth forecasts for 2024 in the previous policy meeting held in March 2024.

Follow US Fed Meeting Outcome LIVE Updates: Powell-led FOMC holds rates steady at 5.25-5.50%, cuts Treasury cap to $25 billion

‘’The Committee seeks to achieve maximum employment and inflation at the rate of two per cent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year,'' said the Fed in its statement. ‘’The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,'' it added.

US Fed Policy May 2024: Here are 5 key highlights


1.US interest rates at over 2 decade-high

The Fed kicked off an aggressive monetary policy tightening cycle by raising the policy rate by 5.25 percentage points since March 2022 – in one of the swiftest Fed reactions to rising price pressures that had eventually hit a 40-year peak.

However, the central bank has it has kept its policy rate in the current range since last July 2023. The Fed’s rate hikes have helped lower annual inflation from a peak of 9.1 per cent in June 2022 to 3.2 per cent. However, they have also made borrowing much costlier for businesses and households.

Today's policy statement also repeated that officials are still seeking "greater confidence" in a continued decline of inflation before they begin cutting interest rates, a language adopted at the Fed's January 30-31 meeting that is likely to stay in place until just before the first rate reduction.
 

2.US Fed to not cut rates until inflation cools

Inflation has eased over the past year but remains elevated, said the US central bank. "In recent months, there has been a lack of further progress towards the Committee's two per cent inflation objective," the Fed said in its statement. 

Where the March statement suggested an improving dynamic, saying that the risks to the economy "are moving into better balance," the current statement hinted the process may have stalled with its assessment that risks “have moved toward better balance over the past year.” 

‘’The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,'' it added. "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 towards two per cent," the Fed repeated in its statement that still indicated the next move on rates will be down.

Fed Chair Jerome Powell said at a post-policy press conference that it was likely to take longer than previously expected for US central bank officials to gain the "greater confidence" needed for them to kick off interest rate cuts. “Inflation is still too high. Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected,'' said Powell.

Also Read: Fed's Powell says looming US election will not sway rate decisions

3. Fed to slow down pace of balance-sheet runoff starting in June

The US central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month compared to the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly.

The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening. It gradually increased the combined amount of Treasury and mortgage bonds it allowed to run off without being reinvested to a total of $95 billion per month.

The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed's last round. ‘’With principal payments of agency securities currently running at about $15 billion per month, the total portfolio runoff will be about $40 billion per month,'' Powell said at the press conference.

While the move could loosen financial conditions at the margin at a time when the US central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.
 

4.Fed's economic projections from March policy verdict

Fed policymakers had updated their economic forecasts, sharply upgrading the US growth outlook for this year to 2.1 per cent, from 1.4 per cent in December.

Policymakers had left the headline inflation forecast unchanged, but slightly raised the outlook for annual ‘core’ inflation -- which excludes energy and food prices -- to 2.6 per cent, compared to 2.4 per cent in the projections issued in December. They also lowered their unemployment rate projection slightly, to four per cent from 4.1 per cent, for 2024.

"Economic activity has been expanding at a solid pace. Job gains have remained strong and the unemployment rate has remained low," said US Fed in March.
 

5.Wall Street rallies on Powell remarks, Yields higher

Wall Street stocks shot higher Wednesday afternoon after Federal Reserve Chair Jerome Powell said the central bank is "unlikely" to raise interest rates. Major indices were up about one percent or more after Powell said the central bank's next change would probably not be an interest rate increase. 

The Dow Jones Industrial Average was up 1.2 per cent at 38,267.75. The broad-based S&P 500 gained one per cent to 5,085.42, while the tech-rich Nasdaq Composite Index jumped 1.5 per cent to 15,896.06.

The world’s biggest bond market surged after Jerome Powell downplayed the possibility of rate hikes and the Federal Reserve said it will shrink its balance sheet. Treasuries climbed across the US curve, with two-year yields dropping below five per cent.

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HomeEconomyUS Fed to hold rates at 23-year high-mark until inflation cools, slows pace of balance sheet runoff: 5 key highlights

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