Fed holds off on rate cuts, sees inflation on 'bumpy' path to goal

A committee of Federal Reserve officials voted Wednesday to keep interest rates at a 22-year high after unexpectedly high job gains and inflation delayed plans for possible rate cuts.

The Federal Open Market Committee (FOMC), the panel of Fed officials responsible for setting borrowing costs, voted to keep its baseline interest rate at the range of 5.25 to 5.5 percent set last July. The FOMC voted unanimously to hold rates steady.

"We believe that our policy rate is likely at its peak for this tightening cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," Fed Chair Jerome Powell said at a press conference Wednesday.

The central bank is not yet confident inflation, which has plummeted since the Fed began hiking rates in March 2022, is on pace to reach its goal of a 2 percent annual rate.

After peaking at a 40-year high of 9.1 percent in June 2022, as measured by the Labor Department's consumer price index, annual inflation has eased significantly, falling to 3.1 percent in January. However, inflation ticked back up slightly to 3.2 percent last month.

"Inflation has eased substantially while the labor market has remained strong. And that is very good news," Powell said. "But inflation is still too high. Ongoing progress in bringing it down is not assured. And the path forward is uncertain."

Meanwhile, the job market has continued to defy expectations. The U.S. economy added 275,000 jobs last month, on top of significant gains in December and January, while the unemployment rate remained below 4 percent.

The jobless rate has stayed below 4 percent consistently for the last two years, marking the longest sub-4-percent streak since the 1960s.

Despite the recent uptick in inflation, Powell emphasized Wednesday that this hasn't "really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2 percent."

Flatlining inflation and strong job growth foiled previous hopes that the Fed would make its first rate cut in March. Economists are now largely looking to the central bank's June meeting for a potential rate cut.

Fed officials indicated in new economic projections Wednesday that they anticipate three rate cuts this year, largely in line with their projections at the end of 2023. More officials consolidated around three rate cuts in the latest projections, although several others still expect two cuts in 2024.

Only one official now anticipates more than three cuts, compared with the five who projected a greater number of rate cuts in December.

After holding interest rates steady throughout the end of 2023, Fed officials signaled that they were open to cutting rates in the coming year. All but three officials said in their December projections that they anticipated two rate cuts in 2024, while the largest group anticipated three.

Stocks rallied after the Fed's projections confirmed the bank was still largely on the course it expected in December. The Dow Jones Industrial Average closed with a gain of more than 400 points Wednesday, reaching a new record high. The S&P 500 index and Nasdaq composite closed with gains of 0.9 and 1.3 percent, respectively.

The politically independent Fed has taken heat from both sides of the aisle for its handling of interest rates and inflation.

Members of the Congressional Progressive Caucus sent Powell a letter Monday calling on the central bank to cut interest rates at the March meeting, even as the central bank was widely expected to keep interest rates steady.

"With core inflation already having come into line with the Federal Reserve's target, today's excessively contractionary monetary policy needlessly worsens housing market imbalances and the unaffordability of home ownership, creates risks for banking stability, and could threaten the achievements of strong employment and wage growth and its attendant reductions in economic and racial inequalities," the lawmakers wrote.

Powell responded to the pressure from lawmakers Wednesday, saying that the Fed can "best serve the public" by achieving its mandate of maximum employment and price stability.

"That's how we can best serve the public and leave the other issues — which in many cases are incredibly important, such as those you mentioned — leave those to the people who have responsibility for those," he said.

Powell has repeatedly resisted political pressure from both parties throughout his tenure at the Fed, including a progressive push for more aggressive climate-related regulations from the central bank.

Powell also brushed off consistent attacks from former President Trump, who staged an unprecedented public campaign to get the Fed to boost the stock market.

Last month, Trump accused Powell — a lifelong Republican whom Trump himself nominated for the job in 2017 — of being "political." Trump went on to suggest Powell may consider cutting rates to help Democrats during the 2024 election.

"I think he's going to do something to probably help the Democrats, I think, if he lowers interest rates," Trump said. "It looks to me like he's trying to lower interest rates for the sake of maybe getting people elected, I don't know."

Powell has repeatedly said partisan politics won't influence the central bank as it attempts to bring the economy in for a rare "soft landing," the technical term for leveraging policy tools including rate hikes to bring down prices without triggering a recession.

But the Fed's interest rates could play a role in the upcoming election. Voters have consistently ranked among their top concerns the state of the economy, which has had an astounding turnaround from a year ago, when many economists were forecasting a recession.

Updated at 4:43 p.m. ET.

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