- The Fed expects to keep interest rates at current levels of 5.25 and 5.5 percent
- U.S. Treasury yields fell below 4 percent ahead of the news this morning
- Officials are cautious about cutting interest rates if the U.S. economy remains strong
The Federal Reserve voted today to keep interest rates stable for the fourth straight day after borrowing costs rose to a 22-year high.
Fed Chairman Jerome Powell opened the door to future rate cuts – but warned: “Inflation is still too high and the path to reducing it is not certain.”
This means the Fed's key interest rate – which has a knock-on effect on mortgages and credit card loans – will remain at its current level of between 5.25 and 5.5 percent, where it has been since last July.
Rate traders now predict a 65 percent chance of a rate cut at the next Fed meeting in March.
The S&P 500 fell 0.9 percent, while the Dow Jones Industrial Average fell 40 points following the news.
The Federal Reserve is expected to keep interest rates steady for the fourth straight day today after borrowing costs rose to a 22-year high. Pictured: Fed Chairman Jerome Powell at the December meeting
Officials will announce their decision at 2 p.m., but economists believe there is little chance of a cut – meaning interest rates will remain at their current level of between 5.25 and 5.5 percent
However, experts noted that the Fed's language has been significantly toned down compared to the last announcement in December.
While last month's statement ruled out the possibility of rate hikes, today's proposed rate cuts could finally come into effect.
According to the CME FedWatch Tool, the probability is now 64.8 percent. That's up from 40.4 percent on Tuesday.
U.S. Treasury yields – an indicator of interest rates charged by lenders worldwide – fell below 4 percent on Wednesday morning.
The Fed's aggressive rate hikes were intended to curb raging inflation, which peaked at 9.1 percent in June 2022. The annual inflation rate was 3.4 percent in December.
But it remains well above the Fed's 2 percent target, meaning a rate cut today appears unlikely.
Seth Carpenter, chief global economist at Morgan Stanley, told Bloomberg: “You can't deny the fact that inflation has fallen sharply, and I don't think they want that.”
“On the other hand, I don’t think there will be a big banner saying “mission accomplished.”
The Fed's key interest rate determines the interest rate banks pay when they lend money to each other overnight. This negatively impacts the interest rates that companies charge their customers on mortgages and credit cards.
Since interest rates began rising, mortgage rates peaked at nearly 8 percent before falling to around 6.6 percent.
“From here on out, Powell is going to be walking a tightrope on policy because the U.S. economy is as good as it gets, and frankly at this point they're trying not to screw it up,” Matt Miskin said. Co-Chief Investment Strategist at John Hancock Investment Management in Boston.
“It's this balancing act for the Fed where you don't want the economy to be so strong that it accelerates inflation again or causes it to rise again,” he said. “But you should also be careful not to be unduly constrained if inflation falls below your target.”
The Fed's aggressive rate hikes were intended to curb raging inflation, which peaked at 9.1 percent in June 2022. The annual inflation rate was 3.4 percent in December
Economists generally say the Fed is unlikely to cut interest rates when consumer spending has remained surprisingly resilient in the face of higher borrowing costs.
The U.S. economy grew 3.1 percent last year, faster than the five-year average before the pandemic and less than 1 percent in 2022.
This resilience was fueled by a red-hot labor market that kept unemployment low.
Private payrolls added 107,000 jobs in the U.S. last month, according to the ADP National Employment Report released today.
A key concern is that the Fed will cut interest rates too quickly, causing inflation to spiral again.
Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said on Jan. 18, “Early rate cuts could trigger a surge in demand, which could put upward pressure on prices.”