The Federal Reserve said Wednesday it would hold its interest rate target steady, a pause ahead of an expected move this year to lower rates in reaction to signs that inflation is cooling.
Following a two-day meeting of its monetary policy committee in Washington, D.C., the Fed announced that it will keep its rate target at 5.25% to 5.50%.
The move was expected. The overwhelming consensus among investors is that the Fed is done raising interest rates and will begin trimming them in the coming months.
But on Wednesday Fed officials indicated that they aren’t yet ready to pivot just yet.
“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 2%,” the Fed statement said.
Still, the current rate target is still the highest it has been since 2006, before the global financial crisis. The last time the central bank raised rates was July. The Fed has also been reversing its massive purchases of government bonds — its total assets are down from a peak of nearly $9 trillion in spring of 2022 to about $7.7 trillion as of Wednesday.
The Federal Reserve’s goal is for long-run inflation to run at about 2%, a level that it considers healthy for the country’s economic growth.
Inflation has largely been falling amid the higher interest rate environment.
December annual inflation was running at 3.4% in the most closely watched index, the consumer price index, while inflation is clocking in at 2.6% in the preferred gauge for the Federal Reserve, the personal consumption expenditures index.
The headline number moving closer to the 2% target has buoyed optimism that a cut will soon be on the horizon. Ahead of the Wednesday announcement, investors were split, with some expecting the first rate cut to come in March and others anticipating that the Fed will hold off until May.
There is a growing sense that the Fed might be able to avoid pushing the economy into a recession, a scenario described as a “soft landing.” In late 2022, some economic models were predicting there would be a recession last year. Instead, gross domestic product growth increased by more than expected.
GDP grew at a 3.3% annual rate in the fourth quarter of 2023, adjusted for inflation, bringing growth for the year to 2.5% in 2023.
The Federal Reserve updates its multi-year projections for inflation, GDP, and unemployment every other meeting. This meeting didn’t feature new projections, although the Fed’s December projections showed the central bank is penciling in about three rate cuts this year.
Fed officials think inflation, as gauged by the personal consumption expenditures index, will decline to 2.4% by the end of 2024. They also predict that unemployment will rise to 4.1% by the end of next year. It is currently four-tenths of a percentage point lower than that.
As of December, the Fed also is projecting very modest 1.4% GDP growth in 2024.
The labor market has also held up surprisingly despite the higher interest rates, although it has been showing signs of slowing in recent months, which is expected, given the tighter monetary policy from the Fed.
The economy added another 216,000 jobs in December, and the unemployment rate was at a healthy 3.7% level.
The jobs report for January will be released Friday by the Bureau of Labor Statistics. Forecasters are expecting that the U.S. added some 173,000 jobs this past month.
The higher interest rates — while not yet significantly dampening the jobs market or gross economic output — are still causing some pain for consumers.
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High interest rates are making it more difficult to take on and pay off credit card debt and making the terms for auto loans more expensive. It has also smashed housing affordability, causing mortgage rates to soar.
As of Wednesday, the average rate on a 30-year fixed-rate mortgage was 6.75%, according to Mortgage News Daily, which tracks daily changes in rates. Recently, mortgage rates peaked at over 8% for the first time since the turn of the century, although they have fallen a bit as the Federal Reserve inches closer to cutting interest rates.