WASHINGTON: The U.S. Federal Reserve held interest rates steady on Wednesday and signaled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.

Indeed, Fed Chair Jerome Powell said it was likely to take longer than previously expected for Fed officials to gain the “greater confidence” needed for them to kick off interest rate cuts.

The Fed’s latest policy statement, issued at the end of a two-day meeting, kept key elements of its economic assessment and policy guidance intact, noting that “inflation has eased” over the past year, and framing its discussion of interest rates around the conditions under which borrowing costs can be lowered.

U.S. stocks pared losses following the release of the policy statement while the U.S. dollar fell against a basket of currencies. U.S. Treasury yields fell.

Investors in contracts tied to the Fed’s policy rate continued to see the U.S. central bank beginning to cut rates in November and added to bets that it will deliver at least one reduction in borrowing costs this year.

US Fed likely to keep rates steady as hopes of early cuts fade

“The (Federal Open Market Committee) does not expect it willbe appropriate to reduce the target range until it has gainedgreater confidence that inflation is moving sustainably towards2%,” the Fed repeated in a unanimously-approved statement thatstill indicated the next move on rates will be down.

“Inflation is still too high,” Powell said in a press conference after the meeting. “Further progress in bringing it down is not assured and the path forward is uncertain.

“It is likely that gaining greater confidence will take longer than previously expected,” Powell said.

That continues to leave the timing of any rate cut in doubt,and Fed officials made emphatic their concern that the firstmonths of 2024 have done little to build the confidence theyseek in falling inflation.

“In recent months, there has been a lack of further progress towards the Committee’s 2% inflation objective,” the Fed said in its statement. Where the prior statement in March suggested an improving dynamic, saying that the risks to the economy “are moving into better balance,” the new statement hinted that the process may have stalled with its assessment that risks “have moved toward better balance over the past year.”

“The Committee marked to market on inflation by noting thatQ1 data didn’t show the additional progress that they hoped tosee, but the statement also suggested that they would not viewfurther labor market strength through an inflationary lens,”said Omair Sharif, president of Inflation Insights.

Balance sheet

The U.S. central bank also announced it will scale back thepace at which it is shrinking its balance sheet starting on June1, allowing only $25 billion in Treasury bonds to run off eachmonth versus the current $60 billion. Mortgage-backed securitieswill continue to run off by up to $35 billion monthly.

Fed to meet amid dwindling hopes of summer rate cuts

The step is meant to ensure the financial system does not run short of reserves as happened in 2019 during the Fed’s last round of “quantitative tightening.”

While the move could loosen financial conditions at the margin at a time when the U.S. central bank is trying to keep pressure on the economy, policymakers insist their balance sheet and interest rate tools serve different ends.

The benchmark policy rate has been held in the current 5.25%-5.50% range since July. Rate cuts had been anticipated as early as March of this year, but have been pushed back as incoming inflation data showed that progress towards the 2% target had stalled. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, increased 2.7% in March on a year-over-year basis.

“Inflation remains elevated,” the Fed’s policy statement said, repeating a phrase that many analysts feel will likely need to be removed as a precursor to an initial rate reduction.

The statement maintained its overall assessment of economicgrowth, saying that the economy “continued to expand at a solidpace. Job gains have remained strong and the unemployment rate has remained low.”