The Federal Reserve kept interest rates in the range of 5.25% to 5.50%, as widely expected, following its two-day monetary policy meeting. Of more importance, Fed officials signaled a cut to interest rates was still possible this year, despite the “no further progress” on inflation.
The post-meeting statement said, “The committee does not expect it to be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” noting “there has been no further progress” toward that objective.
Fed Chair Jerome Powell said, “It is likely that gaining greater confidence [to cut interest rates] will take longer than previously expected,” Powell said. “I do think the evidence shows pretty clearly policy is restrictive and weighing on demand.” The Fed will now focus on how long to keep monetary policy restrictive. He noted the Fed would have to see evidence policy wasn’t sufficiently restrictive to raise interest rates, which is not currently the case.
The Fed announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion. Mortgage-backed securities will continue to run off by up to $35 billion monthly. Powell noted the slowdown in balance sheet runoff was to avoid market turmoil like happened in 2019 during the Fed’s last round of “quantitative tightening.”