Fed holds interest rates steady, gives no sign it will cut soon as inflation fight stalls

WASHINGTON--The Federal Reserve held its key interest rate steady again Wednesday and gave no signal that it plans to lower it anytime soon following a resurgence of inflation early this year. 

In a statement after a two-day meeting, the Fed pointedly said: “In recent months, there has been a lack of further progress toward the (Fed’s) 2 percent inflation objective.”

And it repeated its previous assertion that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation (now running 3% to 4%) is moving sustainably toward” the Fed’s 2% goal.

The concerns about persistent inflation suggest the Fed likely won't be prepared to cut rates for at least a few months, if not longer.

"It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2% inflation," Fed Chair Jerome Powell said at a news conference. "I don't know how long it will take."

Learn more: Best current CD rates

Powell said he expects inflation to resume its easing trend this year, though he added, "My confidence in that is lower."

"I don't know that will be enough, sufficient" for the Fed to lower rates in 2024. "I don't know that it won't."

He said the central bank could reduce its benchmark rate if inflation moves more swiftly toward its 2% target or if the labor market weakens significantly.

In the statement, Fed officials added that the economy “has continued to expand at a solid pace” and “job gains have remained strong.”

Powell added, however, that it's unlikely the Fed would resume hiking rates even if inflation takes longer to tame absent a notable acceleration in consumer prices. That comment sent stock markets higher.

Wednesday’s decision was widely anticipated after inflation readings were higher than expected for a third straight month in March.

What is the Fed's target interest rate?

The Fed’s key rate continues to hover at a 23-year high of 5.25% to 5.5%. Since March 2022, the central bank has hiked the federal funds rate 11 times from near zero to corral inflation but has left the rate unchanged since last July.

The upshot: Americans will continue to grapple with higher borrowing costs for mortgages, credit cards, and auto and other loans but will also benefit from higher savings account yields.

Watch Powell speech LiveThe Fed chair discusses the interest rate decision

How much are wages increasing?

More worrisome inflation news came Wednesday when the Labor Department said total compensation for U.S. workers increased 1.2% in the first quarter, up from a 0.9% rise at the end of last year. Faster wage growth could further stoke rapid inflation if employers pass higher labor costs to consumers through price bumps.

That prospect may harden Fed officials’ inclination to hold off on rate cuts. As a result, the Dow Jones Industrial Average tumbled 570 points Tuesday and futures markets that were forecasting just one rate cut this year in September now expect that move to occur in November.

Why does the Fed sometimes lower interest rates?

The Fed raises rates to make consumer and business borrowing more expensive, curtailing economic activity and inflation. It lowers rates to stimulate weak growth or dig the economy out of recession.

As recently as late March, Fed officials were sticking to their forecast of three rate cuts this year, Inflation eased significantly the second half of last year as pandemic-related supply chain troubles resolved and the price of used cars, furniture and other goods declined.

Although the economy has been remarkably resilient despite high prices and interest rates, Fed policymakers seemed intent on paring back rates as price gains slowed. Otherwise, high rates could excessively constrain the economy after adjusting for inflation.

What is core inflation right now?

At the time, Powell said an acceleration in price increases in January and February could have been blips and inflation likely was still headed to 2% on “a sometimes bumpy path.”

His tone changed after a report last month on the consumer price index revealed that inflation again ran hot in March. That left core inflation, which excludes volatile food and energy items, stuck at 3.8% for a second straight month. It has barely budged since late last year.

Another core inflation gauge that the Fed follows more closely is running a percentage point lower but also has been stubbornly elevated lately.

As a result, Fed officials have said they’re in no rush to cut rates, especially with the economy on solid footing and employers adding an average 276,000 jobs a month in the first quarter.

Expectations that interest rates would drop sharply this year propelled the stock market to record highs but the disappointing inflation numbers and Fed officials’ reaction to them have reversed some of those gains.

Will inflation calm down?

Goldman Sachs says inflation has been propped up by an overriding trend: Price increases for rent, car insurance, health care and other services are still catching up to wholesale costs that were rising or hot markets. But those markets are now cooling and the slowdown should filter through to consumer prices in the next few months, allowing the Fed to cut rates in July and November as well as several times next year, Goldman says.

Economists at Barclays, however, figure lingering COVID-induced labor shortages could keep pay increases and inflation higher for longer. Some forecasters say that could prevent the central bank from lowering rates at all this year and may even put additional rate hikes back in the table. 

Powell has said that a weakening labor market – a scenario that many economists anticipate by mid-year- could prompt the central bank to reduce rates sooner rather than later.

How long will quantitative tightening last?

The Fed on Wednesday also said it will slow the pace at which its $4.5 trillion in Treasury bond holdings has been shrinking. The Fed has allowed up to $60 billion in Treasuries to roll off its books each month by not reinvesting the proceeds from the assets as they mature.

The Fed bought the securities to push down long-term interest rates as the economy teetered during the pandemic. Shedding them has drained some cash from the banking system and put modest upward pressure on rates.

The Fed said it will slow the monthly run-off from its balance sheet to up to $25 billion. Rather than lower long-term rates, the move is designed to ensure there are enough cash reserves in the banking system to allow the Fed to control short-term rates. When the Fed similarly shrank its balance sheet in 2019, low cash reserves disrupted the functioning of money markets. 

The central bank added that it will continue to allow as much as $35 billion in mortgage-backed securities to roll off its balance sheet each month.

For more on today's Fed announcement and other economic trends, keep reading:

Is consumer spending up or down right now?

Household spending increased a hefty 0.8% in March, after a similar rise the previous month.

Personal income rose 0.5%, up from 0.3%.

But Americans are drawing heavily from savings to help finance their purchases, a trend that's unlikely to persist. The personal savings rate, the share of income that households are socking away, fell from 3.6% to 3.2% in March. That's the lowest since October 2022, and down from a pre-pandemic average of about 7%.

They're squirreling away less money from their paychecks and other income, in part because pandemic-related savings are running dry. Credit card debt is at a record high as low- and middle-income people struggle to keep pace with higher costs. And delinquencies are at historic highs.

But job growth is still robust, and average pay increases have outpaced inflation since last spring, giving households more purchasing power. Strong demand for products and services can put upward pressure on prices.

- Paul Davidson

Is the economy growing or slowing?

The U.S. economy slowed more than expected early this year, as weaker business stockpiling and exports offset solid consumer spending and a flurry of housing construction.

The nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 1.6% in the January-to-March period, the Commerce Department said. That’s down from robust growth of 4.1% in the second half of last year, and the lowest reading since spring 2022. It's also below the 2.5% gain projected by economists in a Bloomberg survey.

But the pullback was caused chiefly by businesses that replenished their inventories more slowly and feeble export growth, two volatile categories that don't reflect the economy's fundamental health. Final sales to private domestic purchasers, a metric that excludes those elements, grew a robust 6.1%.

That "illustrates there is still a lot of positive underlying momentum," Paul Ashworth, an economist with Capital Economics, wrote in a note to clients.

- Paul Davidson

Which states have the highest, lowest inflation?

U.S. inflation has remained stubbornly elevated this year, creeping more slowly toward the Federal Reserve’s 2% goal.  

But some states are already there, while others will still be struggling to reach the benchmark even after the nation as a whole has brought inflation under control.

Florida is saddled with the nation’s highest inflation, at about 4%, while Pennsylvania has the lowest, at about 1.8%, according to an analysis of index data by Moody’s Analytics based on a three-month moving average.

For eight northeastern states, yearly price gains are already below 2.5%, and for about a quarter of the U.S., they’re under 2.7%, according to Moody’s analysis.

Generally, inflation has been higher in the South and West, because Americans have flocked to those regions for favorable climates and lower costs.

- Paul Davidson

What is the federal funds rate?

The federal funds rate is what banks pay each other to borrow overnight. It is the target interest rate (technically, a range of interest rates) set by the Federal Open Market Committee, the group that is meeting Wednesday.

If the federal funds rate increases, banks usually pass along that extra cost, meaning it becomes more expensive for businesses and consumers to borrow as rates rise on credit cards, adjustable-rate mortgages and other loans. That’s why the federal funds rate is the key mechanism used by the Federal Reserve to calm inflation.  

Simply put, companies and consumers don’t borrow as much when loans cost them more, and that means an overheated economy can cool, and inflation may dip.  

- Daniel de Visé  

Bitcoin price

The price of bitcoin was down about 2.5% to $58,830 in the 24 hours through 3:07 p.m. Eastern Time on Wednesday, according to CoinDesk.

That price is far below bitcoin’s all-time high of $73,835.57 set on March 14. But bitcoin is up 27.55% this year to date. 

Bitcoin is volatile. And the cryptocurrency just registered its worst month since November 2022, CoinDesk reports. 

Like other investments, bitcoin has been dogged by dwindling hopes for an interest-rate reduction by the Fed, and by a “stagflationary feel” in the national economy, according to the cryptocurrency news site.

Bitcoin’s 16% drop in April was its worst showing since late 2022, when the crypto exchange FTX collapsed.   

- Daniel de Visé

How is the S&P 500 reacting?

Stocks delivered mixed results in reaction to the Fed’s interest-rate announcement. 

The Dow Jones Industrial Average rose 0.2%, losing ground after an afternoon rally. The S&P 500 and Nasdaq both fell 0.3%.

Earlier this year, the prospect of three interest-rate cuts in 2024 had juiced the stock market and led analysts to boost their economic growth forecasts.

Stocks tumbled following disappointing inflation reports in April. But they’ve partly rebounded in the past week on strong earnings from Big Tech companies.

- Daniel de Visé and Paul Davidson

Will mortgage rates ever be 3% again?

Probably not anytime soon.

A delay in interest-rate cuts means that mortgage rates will remain elevated through the summer buying season, economists say. Mortgage rates are influenced by more than Fed rate cuts, but they tend to follow the Fed’s footsteps.

“A later start to Fed rate cuts than we anticipated will push the fall in mortgage rates and recovery in activity into the second half of the year,” said Thomas Ryan, property economist at research firm Capital Economics. He forecasts mortgage rates will drop to 6.5% by year’s end.

The average rate on a 30-year fixed mortgage rate is 7.77%, as of May 1. The 15-year fixed-rate mortgage rate is 6.98%.

Keep in mind that even if you get a cheaper mortgage rate later this year, home prices may be 5% higher than in 2023, Ryan said. Housing supply will remain limited, because people who locked in lower mortgage rates will be reluctant to sell and pay a higher mortgage rate on a new home.

Surveys even suggest it’s better to rent than buy a home almost everywhere now, if you’re not in a hurry.

- Medora Lee

What is the interest rate on I bonds?

I bonds are low-risk investments, linked to inflation, considered a safe bet in volatile times. The Treasury sets new interest rates for I bonds in May and November. Those rates are good for six months.

The current I bond interest rate is 4.28%, announced this week. If you buy some I bonds today, that rate will hold until October 31. 

Issued by the government, I bonds are considered a relatively reliable investment, especially when inflation is running high, which it has been in the last couple of years. The bond’s interest rate has two components: Part of it is fixed, and part varies with inflation.

If you buy I bonds, plan to keep them. You can cash them out after a year, but you will be penalized three months’ interest for bonds that are less than five years old. 

- Daniel de Visé

APR vs. interest rate

What's the Fed decision mean for consumers?

Federal action on interest rates ripples across the economy, affecting everything from mortgages and auto loans to credit cards. It also affects the annual percentage rate, or APR, on any loan.

What’s the difference? An interest rate is what you pay the lender to borrow the money, expressed as a percentage. The APR, also a percentage, is the interest rate plus any additional fees charged for the loan. The APR is generally higher.

One piece of good news for consumers: The APR on new credit cards held steady at 24.66% in April after nearly two years of increases, said Matt Schulz, credit analyst at rate comparison site LendingTree.

The bad news:  That’s tied for the highest rate since LendingTree began tracking monthly rates in 2019, and it’s not likely to drop with Fed rate cuts on hold, he said.

- Medora Lee and Daniel de Visé

How does the Fed rate decision affect savings interest rates?

Savers can benefit a bit longer from higher rates.

“The mantra of ‘higher for longer’ interest rates is music to the ears of savers who will continue to enjoy inflation-beating returns on safe-haven savings accounts, money markets, and CDs for the foreseeable future,” said Greg McBride, chief financial analyst at financial products comparison site Bankrate.

But keep an eye on those rates. Recent bank earnings show profits are getting squeezed from having to pay those higher deposit rates, and with the Fed still expected to cut rates later this year, some banks are starting to ease rates now.

Certificate of deposit (CD) rates “were the first to fall, earlier this year,” said Ken Tumin, banking expert at rate tracker DepositAccounts.com. “A few online banks have now started to lower their online savings account rates.”

For example, the average yield for an online savings account has slipped this year to 4.43% as of April 1 from 4.49%, while a one-year CD dropped to 4.94% from 5.35% and the 5-year CD rate dropped to 3.83% from 3.95%, he said.

Brick-and-mortar account yields are still edging up, but they’re still averaging only around 0.52%.

- Medora Lee

Will I get a break on credit card rates?

The good news is, the annual percentage rate (APR) on a new credit card held steady at 24.66% in April after nearly two years of increases, said Matt Schulz, credit analyst at rate comparison site LendingTree.

The bad news is, that’s tied for the highest rate since LendingTree began tracking monthly rates in 2019, and it’s not likely to drop with Fed rate cuts on hold, he said.

“Prioritizing debt repayment, especially of high-cost credit card debt, remains paramount as interest rates promise to remain high for some time,” said Greg McBride, chief financial analyst at financial products comparison site Bankrate.

If you’ve got good credit, you can still get a 0% balance transfer card to give you some time to pay off your debt, but you must hurry. “They’re getting harder to get and their fees are rising,” Schulz said. “With delinquencies and debt totals rising, some banks are becoming a little more squeamish about taking on transferred balances.”

You can also ask your lender to lower your rate. Three out of every four cardholders who asked for a lower interest rate on a credit card in the past year got one, according to a 2023 LendingTree report.

- Medora Lee

What options do I have to avoid high credit card rates?

If you’ve got good credit and need to make a large, one-time purchase, many balance transfer credit cards offer an introductory 0% APR for new purchases, said Matt Schulz, credit analyst at rate comparison site LendingTree.

Otherwise, you might consider an interest-free buy now pay later loan or a personal loan, he said.

The average APR on a new personal loan is 26.44%, according to LendingTree data, but if you shop around, you might be able to get a much better rate. A new LendingTree report showed major differences among lenders, meaning that borrowers can potentially save thousands of dollars by shopping around to multiple lenders, Schulz said. “Don’t just assume that the first offer you see is your only choice.”

- Medora Lee

Will auto loans get cheaper?

Borrowers’ rates are mostly based on factors like credit background, vehicle price, down payment and the lenders’ borrowing costs and risks. Fed rate moves have only a small effect.

But rates remain elevated, and auto delinquencies are above pre-pandemic levels, Fed data show.

New vehicle average APR was 7.1% in the first three months of the year, marking the fifth consecutive quarter that figure has remained above 7%, while used-vehicle APRs rose one-tenth of a percentage point to 11.7% from late 2023, car research site Edmunds said.

“Unfortunately, until we start getting better news regarding inflation and the Fed starts actually cutting its benchmark rate, rates on just about everything, including auto loans, are probably going to remain steep,” said Jacob Channel, LendingTree economist.

- Medora Lee

Federal Reserve 2024 meeting schedule

Here are the Fed meetings planned for 2024, including this week’s session:

April 30- May 1

June 11-12

July 30-31

Sept. 17-18

Nov. 6-7

Dec. 17-18

-Staff

What is the Fed? 

The Federal Reserve is the hub of the nation’s banking system, working behind the scenes to ensure the economy is stable and functioning sufficiently, and that there is also a balance between the nation’s financial health and consumer interests. Its goal is “maximum employment, stable prices, and moderate long-term interest rates,’’ according to its website. 

-Staff