A “Lack of Further Progress” on Inflation Keeps the Federal Reserve on the Sidelines

While market predictions regarding the Fed’s next moves have changed a lot since the March meeting, today’s press release isn’t very different from the one for the Fed’s last meeting six weeks ago. The biggest difference is the addition of a sentence about the lack of progress toward the 2% inflation target. Since decisions on key rates are highly dependent on price growth converging toward this target, it’s clear that the Fed isn’t ready to pivot anytime soon. But the Fed also offered reassurance that Jerome Powell and other Fed policymakers aren’t considering a rate hike. During the press conference, Jerome Powell reiterated what he has said to the media in recent weeks, namely, that they’re “committed to retaining [their] current restrictive stance of policy as long as it is appropriate” and that “it’s unlikely that the next policy rate move will be a hike.”

In fact, the Fed even eased up on one aspect of monetary policy today. Starting in June, the Fed will slow the quantitative tightening instigated in 2022. This was no surprise. The minutes from the March meeting suggested this would happen. But this decision is somewhat at odds with a higher-for-longer rate environment, especially since there doesn’t seem to be any urgent need for it in the money markets. But the Fed believes “slowing the pace of runoff will help ensure a smooth transition, reducing the possibility that money markets experience stress.”

For the time being, the Fed clearly seems to expect that its next move will be to cut rates. But with inflation moving sideways, it won’t be doing that anytime soon. As Powell stated during the press conference, “it’s likely to take longer for us to gain confidence that we’re on a sustainable path to 2% inflation.” We’ll find out more with the updated forecast that will be released at the June meeting.

The Fed’s decisions to stand pat on rates and slow down quantitative tightening are no surprise. But it nevertheless seems like the Fed needs more time before it will consider lowering rates. The first cut may not happen until November.