Federal Reserve officials left interest rates unchanged on Wednesday and continued to forecast that borrowing costs will come down somewhat by the end of the year as inflation eases.
Fed policymakers have been battling rapid inflation for two full years as of this month, and while they have been encouraged by recent progress, they are not yet ready to declare victory over price increases. Given that, they are keeping interest rates at a high level that is expected to weigh on growth and inflation, even as they signal that rate cuts are likely in the months ahead.
Officials held interest rates steady at about 5.3 percent, where they have been set since July 2023, in their March policy decision.
Policymakers also released a fresh set of quarterly economic estimates for the first time since December, and those projected that borrowing costs will end 2024 at 4.6 percent. That unchanged forecast suggests that they still expect to make three quarter-point rate cuts this year.
Central bankers are trying to guide the economy toward a soft landing — a situation where inflation cools back to normal without a painful economic slowdown that pushes unemployment sharply higher. They want to make sure that they keep interest rates high long enough to bring price increases fully under control, but they also want to avoid overdoing it and causing a recession.
“The risks are really two-sided here: We’re in a situation where if we ease too much or too soon, we could see inflation come back,” Jerome H. Powell, the Fed chair, explained during a news conference on Wednesday. “If we ease too late, we could do unnecessary harm to employment.”
Given those risks, officials are creeping toward rate cuts only cautiously. Mr. Powell avoided giving any hint when asked about when rate cuts might start, in a clear effort to keep the Fed’s options open as it moves toward the next stage in its inflation fight.
Fed officials had lifted rates rapidly from March 2022 to mid-2023 in a bid to hit the brakes on the economy. But they stopped the increases after July, in large part because inflation began to come down sharply toward the end of last year.
Price increases are now much more moderate than they were a few years ago. The Consumer Price Index measure stood at 3.2 percent in February, down sharply from a 9.1 percent peak in 2022. The Fed’s preferred inflation measure, the Personal Consumption Expenditures index, comes out at more of a delay, but it is also down considerably. It stood at 2.8 percent in January after stripping out food and fuel costs for a sense of the underlying “core” price trend.
Fed officials have signaled in recent months that they expect to lower interest rates this year, because cooler inflation means that the Fed does not need to slow the economy so aggressively.
High interest rates weigh on demand by making it more expensive to borrow to buy a house or expand a business, setting off a chain reaction that trickles through the economy and cools the job market. That helps to tamp down inflation, but it also risks creating a painful recession.
Still, inflation is lingering above the Fed’s 2 percent goal even after the 2023 progress, and its descent has recently stalled. January and February inflation readings were warmer than expected. Officials still hope that price increases will continue to fade this year, but they are keeping an eye on incoming data for any indication that they might be wrong.
Policymakers have suggested that they need greater “confidence” that inflation is coming back to 2 percent before they begin to cut interest rates.
The recent tick higher in price increases “certainly hasn’t improved our confidence, Mr. Powell said, noting that the Fed does not “really know if this is a bump on the road or something else — we’ll have to find out.”
Mr. Powell said that a couple of months of warmer inflation data were not enough to suggest that progress on lowering inflation was reversing, though.
“They haven’t really changed the overall story,” Mr. Powell said, explaining that inflation is moving down gradually on a “sometimes bumpy road” to 2 percent.
Mr. Powell made it clear that officials were watching inflation closely as they thought about the path ahead for interest rates, but officials are also scrutinizing other business conditions.
The economy has retained surprising momentum at a time when interest rates are hovering near a two-decade high. Fed officials forecast that growth will be stronger in 2024, 2025 and 2026 than they had previously expected, based on their fresh estimates. Officials also projected that the unemployment rate will remain slightly lower this year than they had earlier anticipated.
Mr. Powell suggested that a strong job market would not be a reason in itself to hold off on cutting interest rates. Last year, the job market grew strongly as immigrants and other workers poured into it, but that did little to stop inflation from slowing.
But if the economy does retain more vigor, it could mean that it takes higher interest rates to slow it down over time.
Officials predicted that they might cut rates slightly less in 2025 than previously anticipated, removing one rate cut from their forecast next year.
The Fed also discussed its plans for its balance sheet of bond holdings at this meeting. Mr. Powell said that officials did not make any decisions, but he signaled that they could soon begin to slow efforts to shrink their security holdings.
The Fed’s balance sheet grew during the pandemic as the central bank purchased bonds in huge sums, first to calm markets and later to stimulate the economy. Officials want to pare those holdings back to more normal levels to avoid playing such a big role in financial markets. At the same time, they want to avoid overdoing the reduction so much that they risk market ruptures.
But for now, markets are especially attuned to what is likely to happen with interest rates — how much they are going to come down, and when that might start.
Stocks rose as Mr. Powell spoke, perhaps interpreting his comments as a sign that officials are still willing to cut rates as long as progress on inflation holds up.
“We’re looking for more good data, and we would certainly welcome it,” Mr. Powell concluded.
