Fed Chairman Says Further Progress on Inflation Has Stalled

Despite admitting defeat in the battle against inflation, the Federal Reserve (Fed) has said it is more inclined to maintain interest rates at their current level for an extended period rather than hike them once again.

The Federal Reserve’s benchmark federal funds rate, which maintained a range of 5.25% to 5.5%, was the highest it has been since July of last year and the highest level in twenty years. Inflationary pressures have leveled down, and the central bank said the Fed will need more time to build confidence in its ability to lower interest rates.

The Federal Reserve has gone through a lot of ups and downs. Federal Reserve policymakers maintained last summer that monetary policy was not tight enough. Despite policymakers’ expectations for additional raises the previous year, the Fed kept its target federal funds rate steady, but without realizing it at the time, the Federal Reserve raised interest rates again in July—the last rise of the cycle. At the September meeting, Fed policymakers reiterated their expectation of one further rise and fewer cuts in 2024, increasing the median prediction for the end of the year from 4.6% to 5.1%.

Fed policymakers shifted their focus away from rate hikes in the subsequent round of estimates. At their July meeting, the Federal Reserve admitted that they had ended their hiking program and revised their year-end prediction for 2024 down to 4.6%, the same as three climbs for the following year.

Due to very strong economic growth in the second half of last year, Fed policymakers may have been mistaken about the tightness of monetary policy. The PCE price index for services was increasing faster than previously thought, with yearly increases of 2.3% in October, 3.1% in November, and 3.7% in December.

Fed policymakers continue to believe that the trend toward disinflation will resume. On Wednesday, Powell said that the best course of action for policymakers is to maintain the current policy rate and wait for further evidence. However, an even longer streak of positive inflation prints would be needed to persuade policymakers that cutbacks are warranted.