The Federal Reserve has opted to hold its target range for the federal funds rate at its highest level since 2001 and to delay, at least until June or later, any potential first rate cut since the Fed began its inflation fight in March 2022.
Following its meeting on Wednesday, the Federal Open Market Committee (FOMC) reaffirmed that the federal funds rate will stay in the 5.25% to 5.50% range, a level in place since June 2023. The decision comes as inflation trends back toward the 2% goal after a brief pause in January, with the March inflation rate resting at 3.5%.
The statement also keeps the door open to any needed adjustment if inflation proves persistent. It notes that the Committee is prepared to adjust the stance of monetary policy as warranted by risks that could hinder the achievement of its objectives, underscoring a strong commitment to returning inflation to 2%. Powell and other policymakers repeatedly emphasize vigilance and flexibility in response to evolving economic data.
Chair Jerome Powell has signaled that a near-term rate increase is unlikely. He described the current policy as restrictive and stated that it should be enough to achieve the goal, while acknowledging that guiding inflation back to 2% will take longer than initially expected.
Regardless of approach, the Fed announced a tightening measure for June: the pace of balance sheet reduction will slow, drawing the monthly cap of government securities from 60 billion dollars to 25 billion dollars. This expected move makes a June rate cut less likely, given the concurrent policy tightening.
“From one meeting to the next”
Powell warned at an economic forum on April 16 that if inflation keeps rising, the Fed may maintain a restrictive stance for as long as necessary. At the same time, there remains substantial room to ease policy should the labor market weaken unexpectedly.
This week, the central bank reiterated that it does not expect to reduce the target range until inflation demonstrates a clear and sustainable move toward 2 percent.
Looking ahead, the committee will monitor a broad set of indicators, including labor market conditions, inflation pressures, and inflation expectations, along with financial and international developments, before taking any further steps. The approach will be assessed on a meeting-by-meeting basis as new data arrives.
In a held pattern since June of last year
In June 2023, the central bank paused after 11 consecutive rate hikes that pushed the policy rate to its highest level in more than two decades. The pause was intended to let incoming data clarify the path to possible rate cuts. Inflation revived somewhat, moving to 3.5% in March, and the conditions needed to begin a conventional easing cycle have yet to materialize.
Analysts increasingly question whether the first rate reduction will arrive in June. Projections from analysts show a shift toward fewer cuts for the year, with optimism tempered by inflation dynamics and labor market resilience.
Macroeconomic mix
March data surprised on the upside with inflation rising to 3.5%, while the core inflation measure excluding food and energy rose to 3.8%. Yet growth showed signs of slowing; first-quarter GDP expanded by 0.4% at an annualized rate, the weakest pace since late 2022. The unemployment rate stood at 3.8% as job gains remained solid, underscoring a mixed economic picture that supports a cautious stance by the Fed.
Taken together, these signals give the Fed room to wait a bit longer before approving any first adjustment to the policy rate, allowing more time for inflation to move clearly toward the 2% target. Some observers even suggest that political considerations could influence the timing of any cuts before the political cycle shifts in November.
The euro area near a June decision
Across the Atlantic, inflation in the euro area cooled to 2.4% in March and held roughly the same pace in April. Inflation containment, coupled with modest growth and a jobless rate around 6.4%, keeps expectations of the European Central Bank’s first rate cut since mid-2021 on track for June. Analysts largely anticipate a sequence of four quarter-point reductions within the year, aligning with the ECB’s macroeconomic projections updates slated for June, September, and December. The balancing act continues as the region navigates energy costs, supply chain dynamics, and domestic demand.