- The Federal Reserve is keeping its key interest rate at its highest since 2001 in an effort to push down inflation, in a widely anticipated move.
- The central bank indicated its willingness to keep interest rates higher for longer until high inflation is vanquished.
- Hopes the Fed would cut rates soon have dimmed as inflation has proven more stubborn than expected at the beginning of the year.
- The Fed funds rate staying high influences interest rates on all kinds of loans, and keeps upward pressure on borrowing costs for mortgages and credit cards among other things.
The cost of living is still rising too fast for the Federal Reserve, and the Fed is keeping interest rates high to fight inflation.
Members of the central bank’s policy committee voted unanimously Wednesday to keep the crucial fed funds rate in its current range of 5.25% to 5.50%. Officials held the rate at its highest since 2001 to fight inflation that’s run too high for comfort in the first few months of 2024 and is still far from the central bank's target of a 2% annual rate.
In an official statement, Fed officials acknowledged that progress against inflation has stalled, necessitating keeping interest rates high to discourage borrowing and spending and cool down the economy.
“In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” the Federal Open Market Committee said in a statement, adding language that was absent from the statement the group made when it previously met in March.
In response, the central bank is likely to keep the fed funds rate higher for longer than previously thought, Federal Reserve Chair Jerome Powell said at a press conference.
"We've stated that we do not expect that it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%," He said. "So far this year, the data have not given us that greater confidence ... It is likely that gaining such greater confidence will take longer than previously expected."
Data is Driving Fed to Hold Rates For Longer
Fed officials have said data have driven their interest rate decisions, and the data has pushed policymakers in a more pessimistic direction as they assess their efforts to quell high inflation that flared up as the economy reopened from the pandemic.
The annual inflation rate, as measured by the Consumer Price Index, had fallen to the 3% range at the outset of the year, down from its recent peak at 9.1% in June 2022. But the Fed’s goal of a 2% annual rate got farther away, as it rose to 3.5% as of March, dampening hopes that the Fed would be able to cut interest rates this summer.
Powell, however, dismissed the immediate need for another rate hike to tame stubborn inflation.
"I think it's unlikely that the next policy rate move will be a hike,” Powell told reporters at Wednesday’s post-FOMC-statement press conference.
Other reports have shown that almost any way you measure it, the economy is running hot despite interest rate hikes since March 2022 that were supposed to cool it down: wage increases are accelerating, home prices are hitting record highs, and jobs remain plentiful—meaning there is little pressure on the Fed to cut interest rates to stimulate the economy and prevent a recession.
A lower fed funds rates would reduce upward pressure on interest rates for mortgages, credit cards, business loans, and other types of credit that currently come with borrowing costs at or near their highest in decades.
Fed Eases Quantitative Tightening
In another expected move, the central bank said it was slowing down the pace at which it was selling off securities from its balance sheet to $25 billion per month from $60 billion per month.
This process, known as "quantitative tightening," removes money from financial markets. It is a reversal of the "quantitative easing" campaign it engaged in during the pandemic, when it did the opposite, buying assets such as mortgage-backed securities in order to stimulate markets, and the economy, with more money.
While this move was widely anticipated, some forecasters weren't expecting the Fed to back off its tightening campaign as much as it did, with many experts predicting it would slow down to $30 billion per month.
"The Fed turns down the dial on QT a bit more than expected, which, while not a rate cut, is a dovish move," Ernie Tedeschi, former chief economist at the White House Council of Economic Advisors posted on social media platform X.
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FAQs
Citing a lack of progress in reducing inflation, the Federal Reserve kept its policy rate unchanged at 5.5% at its meeting on Wednesday, the same rate it has had since July.
How does the Fed respond to high inflation? ›
When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.
What interest rates are the Fed holding? ›
The Fed on Wednesday said it is keeping the federal funds rate in a range of 5.25% to 5.5%, the same level it has held since the central bank's July 2023 meeting, which is its highest level in more than 20 years.
What is the Fed's decision on interest rates? ›
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Why is the Fed keeping interest rates high? ›
By keeping borrowing costs high, the Fed is hoping to cool the economy and reduce the pressures pushing up prices. But with inflation in the US proving more persistent than expected, the bank is facing questions about its next move.
How long will Fed keep interest rates high? ›
Survey: Fed will keep interest rates historically high until end of 2026.
Who controls inflation in the United States? ›
The Fed is the nation's central bank, and perhaps the most influential financial institution in the world. It is charged with helping the U.S. maintain stable prices (inflation), promote maximum sustainable employment and provide for moderate, long-term interest rates.
Who benefits from inflation? ›
Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.
Why isn't inflation going down? ›
Demand, which the Fed's rate hikes were supposed to quell, has remained robust, helping drive inflation and signaling that the central bank may not have as much power as it thinks to bring down the pace of price increases.
What will interest rates look like in 5 years? ›
ING's interest rate predictions indicate 2024 rates starting at 4%, with subsequent cuts to 3.75% in the second quarter. Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%.
MBA: Rates Will Decline to 6.4% In its April Mortgage Finance Forecast, the Mortgage Bankers Association predicts that mortgage rates will fall from 6.8% in the first quarter of 2024 to 6.4% by the fourth quarter. The industry group expects rates will fall below the 6% threshold in the fourth quarter of 2025.
Will the interest rate go down in 2024? ›
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023. However, if the U.S. does indeed enter a recession, mortgage rates could come down.
Who benefits when Feds raise interest rates? ›
On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits. The average savings yield is now almost 10 times higher than it was when the Fed first started raising rates, and online banks often offer even higher yields.
When can we expect the Fed to lower interest rates? ›
As recently as their last meeting on March 20, the officials had projected three rate reductions in 2024, likely starting in June. But given the persistence of elevated inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.
Will CD rates go up in 2024? ›
The Fed boosted its benchmark federal funds rate numerous times throughout 2022 and the first half of 2023, finally holding rates steady at a target range of 5.25% to 5.50% through the second half of 2023. Rates may eventually begin to decline in 2024.
Does the federal funds rate fluctuate? ›
How does the Fed set interest rates? The Federal funds rate is set eight times per year by the Federal Reserve's Federal Open Market Committee (FOMC). In addition to these eight annual meetings, the FOMC can also call emergency meetings to immediately change the rate during times of crisis.
How does the Fed keep price level stable? ›
Conducting monetary policy
The basic approach is simply to change the size of the money supply. This is usually done through open-market operations, in which short-term government debt is exchanged with the private sector.
How often does Fed adjust rates? ›
The FOMC meets eight times a year to discuss whether to adjust the federal funds rate, a benchmark that governs overnight lending between commercial banks.
How does the Fed maintain stable prices? ›
The Federal Reserve's dual mandate is to achieve maximum employment and keep prices stable. It does this by controlling the money supply, and raising or lowering interest rates when the economy is slowing down or growing too fast.
