Fed Keeps Rates Steady With Cuts Unlikely Until September at the Soonest

Given economic reports over the last few months, there was no surprise that the Federal Open Market Committee of the Federal Reserve decided to hold the benchmark federal funds rate target range steady at 5.25% to 5.50%.

While reporters kept asking for timelines or indications of how things might change going forward, Fed Chair Jerome Powell made a couple of remarks that suggest there would be no cut until the September FOMC meeting at the earliest, making three cuts highly unlikely and even putting pressure on expecting two.

“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 2 percent,” the post-vote FOMC statement said.

“The strength of the labor market buys the Federal Reserve time to be patient before normalizing monetary policy,” said Oxford Economics in an emailed statement. “The timing of the first rate cut depends on a sustained moderation in inflation after a hot start to the year. Our baseline assumes the Fed will start to cut rates in September, but the risks are tilted toward a later start.”

During the press conference after the statement, multiple reporters looked for insight into what would make the Fed reconsider and under what timetable. Powell kept to the usual statements about decisions depending on data — he was insistent that politics doesn’t play a role — and that when the central bank was confident about making changes, it would.

However, he made a couple of statements that almost guarantee September as being the absolute earliest they would consider lowering rate. Powell mentioned that the FOMC had been feeling more confidence and didn’t want to change directions on a month or two of data, but that there had now been a solid quarter where inflation was getting hotter, which reduced their confidence on how things were proceeding.

If it took a full quarter to reduce confidence, it would seem likely at least another quarter of data would be necessary to change sentiment again. Q2 data won’t be fully in until July. Assuming things don’t suddenly readjust themselves by then to be clearly where they were in December, that would make August still seem early, leaving September as the first likely time for a decrease. And that that point, that leaves only the November and December meetings, so under best conditions, two cuts might be possible. But the Fed again might way until January 2025 to see how the economy was doing after one change.

On a brighter side was this part of the statement: “In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.”

“Some good news from today’s meeting was the Fed’s announcement that it would adjust the quantitative tightening program to allow less runoff of the Fed’s securities each month commencing in June,” said Marty Green, principal and mortgage law firm Polunsky Beitel Green, in emailed remarks. “Over time, this adjustment should have some positive impact on interest rates without the Fed needing to adjust the Fed funds rate.”