Lending Association

Fed holds high interest rates amid calls for cuts

The US Federal Reserve has opted to leave interest rates at a 23-year high, disregarding market expectations for a potential pathway to rate cuts.

The central bank did not provide any indication of when it might begin reducing borrowing costs this year, contrary to market desires for at least one cut by mid-year.

The Fed’s reasoning for this decision also applies to the Reserve Bank, and we can anticipate a similar tone from them after their first meeting of the year next Tuesday.

Despite a two-year low in consumer price inflation, the actual rate remains well above the RBA’s target of 2% to 3% over time. Both the Fed and the RBA are expected to emphasize that there will be no reduction in rates until cost pressures ease further.

The Fed’s decision to resist investor demands caused Wall Street to slide, with US 10-year bond yields dropping to just over 3.97%, even as the US dollar’s value increased. The Australian dollar traded lower at 65.65 US cents just after 7 am on Thursday, Sydney time.

In addition to the 11 rate hikes since early 2022, the Fed has been allowing its bond holdings to mature, resulting in a reduction of over $US1.2 trillion from the central bank’s balance sheet, further tightening monetary policy.

The statement from the Federal Open Market Committee indicates that the balance sheet runoff will continue at its current pace.

The committee removed language from its post-meeting statement that had previously indicated a willingness to keep raising interest rates until inflation was under control and moving toward the Fed’s 2% inflation goal. However, the statement also clarified that there are currently no plans to cut rates while inflation remains above the central bank’s target.

The statement outlined the factors that will be considered when making policy adjustments. It stated, “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 percent.” Additionally, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Chair Jay Powell mentioned during his post-meeting media conference that the bank is waiting for additional data to confirm that current trends are continuing. He also indicated that a rate cut in March is unlikely.

The change in wording of the statement suggests that the Fed is preparing for rate cuts as it observes inflation, as measured by its preferred core personal consumption expenditure (PCE) statistics, easing to a 2.9% annual rate in December, the lowest since March 2021. While core PCE prices align with the Fed’s 2% target on a three and six-month basis, the central bank is cautious about confirming that cost pressures have been sufficiently overcome to warrant a cut in the federal funds rate, which currently stands at 5.25% to 5.50%.