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The Federal Reserve announced on Wednesday that it was holding interest rates steady at 5.25% to 5.5%, their highest level in two decades, as inflation continues to plague the US economy.
Although some had hoped the Fed would soon cut interest rates, which are at their highest level since 2007, the annual inflation rate has stubbornly remained above 3%. The Fed’s target interest rate is 2%.
“The committee does not expect that it will be appropriate to lower the target range until it has greater confidence that inflation is moving sustainably toward 2 percent,” the Fed said in a statement that was largely unchanged from its statement after its previous meeting in March, when it also kept rates steady. “The Commission will carefully assess incoming data, the evolving outlook and the balance of risks.”
While the inflation rate reached 3% last June, the lowest level since early 2021, inflation has continued to fluctuate between 2% and 4% over the past few months. Inflation fell to 3.1% in January, down from 4.1% in December, giving investors hope for potential rate cuts later in the year. But the rate rose in February and March, reaching 3.5% in March.
Inflation peaked in June 2022 when the inflation rate reached 9.1%, a 40-year high. In April, after the release of inflation data for March, Joe Biden noted that inflation had fallen 60% from its peak, “but we still have more to do to reduce costs for hard-working families.”
“Prices are still too high for housing and groceries, although prices of key household goods such as milk and eggs are lower than they were a year ago,” the US president said.
In April, Fed Chairman Jerome Powell confirmed that Fed officials were skeptical about moving rates given recent inflation data. Earlier in the year, some economists believed the Fed would cut rates as many as three times before the end of the year. But inflation data from March reinforced doubts about cuts in the foreseeable future.
“The latest data has clearly not given us more confidence and instead shows that it is likely to take longer than expected to achieve that confidence,” Powell said at this time.
Powell reiterated the Fed’s lack of confidence that inflation is cooling enough to cut interest rates at a news conference after the announcement.
“In recent months, inflation has shown a lack of further progress towards our 2% target,” Powell said, noting that inflation this year has been higher than expected. “It will probably take longer to gain confidence than previously anticipated.”
Powell said the Fed was prepared to hold interest rates “as long as necessary.”
When answering questions, Powell noted that the next rate move is unlikely to be a rate hike, rather officials are thinking about how much longer they have to hold the current rate.
“Inflation is moving sideways,” Powell said, noting that the Fed is also keeping a close eye on the labor market, which remains strong despite higher rates.
The Fed’s next Federal Open Market Committee will be held on June 11 and June 12.
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