Fed Sticks with High Interest Rates: Will it Ever Lower Them?

On May 1, the US Federal Reserve (Fed) made a significant decision to keep the reference interest rate unchanged at a 23-year peak and denied the possibility of increasing interest rates. The Fed had previously increased interest rates 11 times since March 2022 to curb inflation, but recent figures show a lack of improvement in inflation. During a press conference, Fed Chairman Jerome Powell stated that inflation is still too high and the ability to cool down is not sustainable. The personal consumption expenditures price index (PCE) in March was 2.7%, above the Fed’s target of 2%.

The Fed’s decision not to raise interest rates was expected by the market, as it has kept rates unchanged in the past five meetings. After Powell announced that it was unlikely to raise interest rates further, stock markets fluctuated mixed, with the DJIA closing up 0.2% while the S&P 500 and Nasdaq Composite fell 0.3%. The Fed also announced easing restrictions on the economy by reducing the rate of balance sheet contraction, allowing government bonds to mature without buying them back. Powell mentioned scenarios that could lead to interest rate cuts, including inflation cooling as the economy and job market stabilize.

The US job market remains solid with an unemployment rate below 4% and businesses actively recruiting. Powell forecasts that the economy and inflation will cool in the second half of the year as savings from the pandemic diminish. However, persistent inflation is delaying projections for when the Fed will start cutting interest rates. Some banks predict interest rate cuts as early as July while others believe it may take until December for