The Federal Reserve held interest rates steady Wednesday after months of higher-than-expected inflation.
After a two-day meeting of its Federal Open Market Committee in Washington, D.C., the Fed announced it will keep its rate target at 5.25% to 5.50%. The move was widely telegraphed.
Because inflation has proven sticky in the first half of the year, the timing for when the Fed might first cut interest rates has been consistently pushed back since the start of 2024. For a time, the possibility of no interest rate revisions this year looked like it could become a reality.
The Fed has held interest rates steady since last raising rates in July. The rate target is still the highest it has been since 2006, before the global financial crisis.
The Fed’s goal is for long-run inflation to run at about 2%, a level that it considers healthy for the country’s economic growth.
According to the most recent reading of the closely watched consumer price index, released Wednesday, inflation fell a tenth of a percentage point to 3.3% for the year ending in May. That was welcome in that the headline number is falling, but is still a way off from where the Fed wants it to be.
Thus far, the resilient labor market has given the Fed insulation to keep interest rates high.
Higher interest rates are meant to filter through the economy and slow demand for goods and services, with a knock-on effect on labor. If the unemployment rate starts to rise, it would also be harmful to President Joe Biden in an election year.
The economy added 272,000 jobs in May, and the unemployment rate rose a tenth of a percentage point to 4%, the Bureau of Labor Statistics reported last Friday.
Still, there are some signs that the labor market is softening.
Job openings fell 5% in April to just under 8.1 million, a decline of about 19% from a year ago, the Bureau of Labor Statistics reported earlier this month in an update to the Job Openings and Labor Turnover Survey. That marks the least monthly job openings since February 2021, when the labor market was still struggling to bounce back from pandemic-related disturbances.
For context, monthly job openings peaked in March 2022, the first month the Fed hiked interest rates, at over 12 million, so the most recent numbers mark a 33% decline from that time.
In another bright spot, GDP growth has also remained positive. The Bureau of Economic Analysis found that GDP expanded at a 1.3% seasonally adjusted annual rate in the first quarter of this year.
While economic growth remained positive in the first quarter, the slowdown is a notable drop from the preceding quarter, when GDP grew at a healthy 3.4% clip.
Years of high inflation have made the economy unpalatable to many voters. While inflation is much lower than it was at its peak, the cumulative price hikes have scarred households. For voters, more than three years of compounded inflation is making them feel poorer and negatively coloring their perceptions of the economy — bad news for Biden.
For instance, while the prices for food at home — grocery prices — have only increased by 1% over the past year, they are up more than 20% since Biden entered office. Clothing prices are up less than 1% since May 2023, but 11% since January 2021. Energy prices have risen 3.7% this past year but have exploded more than 35% during Biden’s presidency.
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There are concerns that the Fed may decide to cut interest rates too early if the economy starts slowing. During the Great Inflation of the 1970s, the Fed had to repeatedly raise and cut rates as inflation proved sticky. The worry is that if the central bank cuts too soon, inflation could stage a resurgence, forcing the Fed to hike again — adding to recession fears.
“A potential slowdown later on might encourage the Fed to do its own stimulus now by lowering rates and growing its balance sheet,” Ryan Young, an economist with the Competitive Enterprise Institute. “Markets will expect inflation to go back up, and factor that into today’s prices in a situation where expectations influence outcomes, leading to their own confirmation.”