US Fed Holds Interest Rate Steady for 4th Consecutive Time
"Greater Confidence Needed to Bring Inflation Down to 2%"
Early Rate Cut Dismissed, US Stock Market Falls Across the Board
"The likelihood of a rate cut in March with confidence is low. Inflation remains high, and the future path is uncertain."
Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), drew a line under expectations for an early rate cut in March. At the Fed's first Federal Open Market Committee (FOMC) meeting of the year, the interest rate was held steady for the fourth consecutive time, stating that greater 'confidence' is needed until inflation falls to the Fed's 2% target. However, by symbolically removing the phrase 'tightening bias' from the policy statement, the door was left open for a rate cut this year as previously signaled. The market assessed that the tone was somewhat more hawkish (favoring monetary tightening) compared to the dovish (favoring monetary easing) stance at the December meeting last year.
At a press conference following the January FOMC meeting on the 31st of last month (local time), Chairman Powell said, "We are confident that inflation is steadily slowing toward the 2% target, but we need greater confidence." He added, "Inflation data over the past six months has been sufficiently low," but emphasized, "Inflation remains high, and the future path is uncertain. We need evidence to be confident in a sustained slowdown of inflation."
He also dismissed expectations in some parts of the market for a rate cut in March. He said, "Based on this meeting, I think the likelihood of reaching a level of confidence to cut rates by the March meeting is low," adding, "We need to watch closely." Contrary to the market's expectations for an early rate cut, the Fed indicated it will not rush to change the monetary policy direction until confirming further inflation slowdown.
However, the intention to cut rates this year was clearly stated. Chairman Powell said, "It is likely that our policy rate has peaked in this tightening cycle," and "If the economy develops gradually as expected, it would be appropriate to lower the policy rate at some point this year."
He also hinted that discussions among Fed officials regarding the timing of rate cuts have taken place. He said, "No member proposed a rate cut, but there were broad and healthy differences of opinion about the timing of a cut."
Powell's press conference was evaluated as hawkish, unlike last month when a rate cut was anticipated.
In the FOMC policy statement released before Powell's press conference, the Fed assessed, "Recent indicators show that economic activity is expanding at a solid pace," and "Job gains have slowed since early last year but remain strong, and the unemployment rate remains low." It also stated, "Inflation has eased over the past year but remains elevated," and "It is not appropriate to reduce the target range until we gain greater confidence that inflation is moving sustainably toward 2%."
However, the Fed left open the possibility of a rate cut in the future through the policy statement. The phrase "the extent of any additional policy firming," which had been included for the past year to indicate the Fed's willingness to raise rates further, was removed. By removing this phrase, the Fed symbolically opened the door to the possibility of a rate cut.
As the Fed ruled out an early rate cut in March, the New York stock market is falling across the board. The Dow Jones Industrial Average, composed of blue-chip stocks, is down 0.77% compared to the previous close as of 3:53 p.m. The S&P 500 and Nasdaq indices are also down 1.58% and 2.21%, respectively. The two-year Treasury yield, sensitive to monetary policy, moved up from around 4.21% in the morning to about 4.45%.
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