MNI: Fed Needs More Confidence In Inflation Drop Before Cuts

The Federal Reserve left interest rates on hold for a fourth meeting Wednesday and pushed back against market expectations for an imminent cut in interest rates, saying it does not expect to reduce borrowing costs until officials are more certain inflation is heading comfortably back to 2%.

"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 said in its post-meeting statement.

That was a shift from previous guidance stating the FOMC was mulling "the extent of any additional policy firming that may be appropriate." 

Markets have been aggressively pricing in a strong chance of as much as 150 basis points of rate cuts this year, potentially starting as early as March.  Policymakers appeared less inclined to cut rates so soon. 

The FOMC kept the federal funds target range at a 23-year high of 5.25%-5.5%, as widely expected. Markets are still pricing in about a 50% chance of a March hike though policymakers have so far not made any clear commitments.

Fed Chair Powell will face questions from reporters at a 2:30pm ET press conference on the likely timing of rate cuts as well as any discussions the committee may have had regarding a possible tapering of the pace of balance sheet runoff, or QT.  

'BETTER BALANCE'

The decision comes in the wake of favorable inflation data that has nonetheless been accompanied by very strong growth readings. GDP jumped 3.3% in the fourth quarter after a 4.9% spike in the preceding three months. 

The Fed's preferred inflation measure, the PCE price index, came in at 2.6% in December, while core PCE prices grew less than 3% for the first time since 2021.

“The committee judges that the risks to achieving its employment and inflation goals are moving into better balance,” the Fed said in another new addition to its policy statement. "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." 

The job market has shown some sign of softening but remains robust, generating some 216,000 jobs last month, and with the unemployment rate still at a historically low 3.7%.

Hopes are high among policymakers and investors alike that the economy could pull off a vaunted soft landing, where inflation comes back to target without major economic pain or job losses.