The US Federal Reserve voted to leave interest rates on hold for the sixth consecutive meeting but policymakers flagged a “lack of further progress” on inflation.
The widely anticipated decision means the federal funds rate remains at a 23-year high, standing in a range of 5.25 to 5.50 per cent.
Markets were less focused on the decision itself than the Federal Open Market Committee’s (FOMC) accompanying statement, which revealed concerns about the persistence of inflation.
“Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s two per cent inflation objective,” it said.
“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 two per cent,” policymakers confirmed.
The statement suggests markets will have to wait a little bit longer for the Fed to unwind its historic bout of monetary tightening, reflecting sticky price pressures.
Inflation has come in ahead of expectations for three months in a row, with March’s consumer price index (CPI) showing a slight acceleration in price pressures. The headline rate climbed to 3.5 per cent.
Looking at the longer term, there has been very little progress on CPI inflation since last summer when it touched three per cent.
Figures released last Friday showed that underlying inflation – measured by the core personal consumption expenditure index – rose 0.3 per cent last month, bringing the annual rate of inflation to 2.8 per cent.
Seema Shah, chief global strategist at Principal Asset Management said: “The Fed can no longer hide behind the idea that the recent strength in inflation is transitory. Their admission that there has been a lack of further progress confirms that imminent rate cuts are extremely unlikely.”
The US labour market meanwhile continues to power on, with figures released earlier this morning showing the private sector adding more jobs than expected yet again.
The persistence of inflation and a strong labour market has already forced traders to rethink the timing of the first rate cut. At the beginning of the year, traders thought the Fed would start cutting rates in March with as many as six interest rate cuts expected throughout 2024.
After the Fed’s announcement, CME’s Fedwatch put the odds of a September cut at 39 per cent, down from a 50 per cent chance shortly before the meeting.
The Bank of England meets next week and is also widely expected to leave rates on hold.
