One Sentence Missing From Fed Statement Puts Focus on Future Interest Rate

The Federal Reserve’s decision to remove a sentence about future rate increases in its latest statement has many hoping that this week’s bump will be the last for the foreseeable future.

The Federal Reserve on Wednesday raised interest rates by a quarter-point in the 10th straight increase as inflation remains stubbornly high. The bump will bring the benchmark funds rate to a range of 5 percent to 5.25 percent, the highest in 17 years.

Noticeably absent from the statement was a previous line that said the central bank “anticipates” additional policy firming, marking a shift from the last few months when the Fed assumed that additional increases would be necessary.

Speaking shortly after the announcement, Federal Reserve Chairman Jerome Powell addressed the “meaningful change,” saying that the bank purposely took out that language because the Fed is “no longer” anticipating a need for additional rate increases.

Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting on May 3, 2023, in Washington, D.C. The Federal Reserve announced a 0.25 rate increase, bringing the key federal funds rate to more than 5 percent, a 16-year high.
Anna Moneymaker/Getty

“We’ll be driven by incoming data and we’ll approach that question at the June meeting,” Powell said.

In March, the Fed said: “The Committee anticipates that some additional policy firming may be appropriate.”

On Wednesday, however, the statement from the central bank reads, “In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

However, Powell clarified that future increases were still contingent on economic data, which would need to “sufficiently” show the Fed that officials can put a pause on the hikes.

“We’re going to need data to accumulate on that, [that’s] not an assessment that we’ve made that would mean we’ve reached that point,” he said. “I think it’s not possible to say that with confidence now. We’ll approach that question at the June meeting.”

Over the last 13 months, interest rates have been raised at a speed that has not been seen in years. In March 2022, the rate was near zero. But with inflation reaching a four-decade high in June, the central bank was forced to tighten monetary policy to slow economic activity.

Overall inflation has fallen from June’s 9.1 percent but remains about 5 percent as of March.

On Wednesday, Powell said the numbers remain “well above” the bank’s goal of 2 percent, so the fight against inflation continues.

“Inflation has moderated somewhat since the middle of last year,” he said. “Nonetheless, inflation pressures remain…high and the process getting inflation back down to 2 percent has a long way to go.”

Source link