WASHINGTON – The US Federal Reserve on May 1 held interest rates steady for a sixth straight meeting, keeping the level at a 23-year high to fight stubborn price increases.

After a two-day gathering, the US central bank decided unanimously to keep the benchmark lending rate unchanged at 5.25 per cent to 5.50 per cent, citing a “lack of further progress” towards its 2 per cent inflation target.

“The economic outlook is uncertain, and the committee remains highly attentive to inflation risks,” the Fed said in a statement.

For months, the US central bank had held its benchmark lending rate at a high level to cool demand and rein in price increases. A slowdown in inflation in 2023 had fuelled optimism that the first cuts had been on the horizon.

But inflation had accelerated, throwing cold water on hopes of an early rate reduction.

The Fed said it did not expect to lower rates until it had “greater confidence” that inflation was moving sustainably towards its target.

Federal Reserve chair Jerome Powell told a press conference: “It is likely that gaining such greater confidence will take longer than previously expected”.

While the US central bank was prepared to hold rates at a high level for as long as appropriate, Mr Powell added that it was “unlikely that the next policy rate move will be a hike”.

Possible cuts?

The Fed’s statement did not significantly change the general outlook that a first rate cut would likely occur in September, said economist Ryan Sweet of Oxford Economics. This was contingent upon inflation slowing, he added.

While markets saw a September cut “as a coin flip”, a few good inflation reports could change the narrative, Mr Sweet said.

May 1’s statement also “contains no hawkish pivot in tone”, noted Pantheon Macroeconomics chief economist Ian Shepherdson.

Policymakers instead “provided reassurance” by saying that risks to achieving the Fed’s employment and inflation goals had “moved toward better balance”, he said.

Analysts believed this meant the door remained open to rate cuts in 2024.

The Fed previously pencilled in three cuts in 2024 but hotter-than-anticipated inflation had made things less certain.

Mr Shepherdson said, however, that “we see nothing in the statement that will prevent the Fed from pivoting to reducing interest rates multiple times this year” if conditions  allowed it.

Mr Powell also said the Fed was prepared to respond to an “unexpected weakening” in the labour market.

If that market started to flag, “the Fed could cut rates even with inflation above its 2 per cent goal to keep the jobs expansion going”, said Navy Federal Credit Union corporate economist Robert Frick.

Avoiding politics

As hope dwindled for rate cuts in the first half of 2024, the Fed faced a growing possibility that eventual reductions would coincide with the run-up to November’s US presidential election.

This could give the economy a boost while Democrats and Republicans vied to win over voters.

But the converging timeline may prove uncomfortable because the Fed, as the independent US central bank, sought to avoid any appearance of politicisation.

Mr Powell pushed back strongly when asked if the election affects interest rate decisions.

“I can’t say it enough: that we just don’t go down that road,” he said. Mr Powell pointed to his track record, noting it was his fourth time working through a US presidential election.

“Read all the transcripts and see if anybody mentions in any way the pending election. It just isn’t part of our thinking,” he added.

On May 3, US Treasury Secretary Janet Yellen is due to stress the importance of strong democratic institutions as well. Ms Yellen, who was a former Fed chair, said in prepared remarks released on April 1: “As chair of the Federal Reserve, I insisted on the Fed’s independence and transparency because I believe it matters for financial stability and economic growth.”

A recent Wall Street Journal report said allies of former US president Donald Trump were drafting proposals that could erode the Fed’s independence if he wins a second term.

Balance sheet

On May 1, the Fed also announced that from June, it would slow the pace of decline of its securities holdings.

It would reduce the cap on US Treasury securities it allowed to mature each month without being replaced from US$60 billion (S$81.6 billion) to US$25 billion.

The cap on how many mortgage-backed securities could roll off its books remained unchanged at US$35 billion monthly.

The Fed embarked on a policy of so-called quantitative easing during the pandemic, swelling its balance sheet by buying assets including US Treasury securities to support the economy through economic turmoil.

Since rolling back the policy in 2022, the Fed had steadily reduced its holdings. AFP