Fed holds interest rates steady, citing stalled progress on inflation

Driving the news: The Federal Open Market Committee, the monetary policy-setting body of the central bank, kept its target interest rate in a range between 5.25% and 5.5%—where it has been since last July.

• In comments at his news conference, chair Jerome Powell confirmed that recent inflation data mean the Fed won't cut interest rates as soon as it had previously signaled.

What they're saying: "So far this year the data have not given us that greater confidence" inflation is heading down to 2%, he said. "It is likely that gaining that greater confidence will take longer than previously expected.

• He added, however, that, the Fed is also "prepared to respond to an unexpected weakening in the labor market," which suggests bad news in the job market could also trigger rate cuts.
• He also poured cold water on the notion that the Fed's next move will be to raise rates, saying: "I think it's unlikely that the next policy rate move will be a hike."

The Fed's key policy statement said that inflation had cooled over the past year, though it remains high.

• But, notably, officials added a new sentence that said: "In recent months, there has been a lack of further progress toward the Committee's 2% objective."
• "We remain highly attentive to inflation risks," Powell said.

The big picture: Price pressures cooled notably in 2023. But key indicators so far this year have shown that progress has all but stalled out.

• Meanwhile, the labor market has stayed hot, and the Fed said in its statement that job gains "have remained strong."
• The unemployment rate has stayed below 4% for more than two years, the longest stretch in a half-century.

State of play: Fed officials have suggested in recent weeks that signs of sticky inflation mean the central bank might have to hold interest rates at a higher level for longer than previously anticipated—unless the job market cools.

• One month ago, the CME FedWatch tool showed strong odds of two rate cuts this year. Those odds have dropped to an estimated 40% chance of one rate cut before the end of the year.
• Financial markets, too, have braced for higher rates: The yield on the 2-year Treasury note—which is most sensitive to anticipated Fed moves—topped 5% for the first time since last fall.

The Fed also announced that it would slow the run-off of its multitrillion-dollar balance sheet—a process, known as quantitative tightening, that has been underway for nearly two years.

• Beginning next month, the Fed said it would shrink the pace of decline of its Treasury securities by more than half, from $60 billion to $25 billion.
• The rolloff of mortgage-backed securities will remain unchanged.

Editor's note: This story was updated with comments from Fed Chair Jerome Powell.