Fed Holds Key Interest Rate Steady, Says A March Cut is Unlikely

The Federal Reserve isn’t ready to stop pushing back inflation with high interest rates—and may not be by its next meeting in March, as financial markets had anticipated.

As widely expected, the Federal Reserve on Wednesday held its key fed funds rate steady at a 22-year high of a 5.25%-5.50% range Wednesday. The Fed said it is looking for more progress in lowering inflation before cutting rates.

The high inflation that inspired the rate-hike campaign has fallen considerably since it spiked nearly two years ago, leading the Fed’s policy committee to indicate it could begin to cut interest rates at some point. While the Federal Open Market Committee added language to its official statement Wednesday referring to rate cuts, it said it was too soon to make them.

In a post-announcement press conference, Federal Reserve chair Jerome Powell pushed back against market expectations of a rate cut early in the year. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting,” he said.

“Inflation is still too high, ongoing progress in bringing it down is not assured and the path forward is uncertain,” Powell said. “The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” 

While the FOMC’s official statement didn’t commit to either cutting or holding the rate steady, it did abandon the idea of raising it again. Wednesday’s statement was the Fed’s first since March 2022 to lack any language suggesting that more rate hikes are on the table.

The decision to keep the rate steady for now keeps interest rates on mortgages, credit cards, auto loans, and other credit at their highest in decades. Household budgets and the broader economy are feeling the pinch from those high rates, which are intended to quell inflation by discouraging borrowing and spending.

Financial markets are anticipating the Fed’s next move, and investors were closely watching what Powell said for clues about whether the central bank will cut the fed funds rate at its meeting in March.

Before the release of the Fed statement, markets were pricing in a 56% chance of that happening, according to the CME Group’s FedWatch tool, which forecasts interest rate movements based on fed funds futures trading data. By the time the press conference ended, markets were pricing in just a 36% chance of a rate cut in March.

The Fed also continued using the other major weapon in its anti-inflation arsenal: selling its assets, mainly mortgage-backed securities, to take money out of financial markets—a policy known as quantitative tightening. Tightening has gone hand-in-hand with interest rate hikes, reversing the quantitative easing that the Fed did during the pandemic when it bought trillions of dollars of securities to flood markets with money and support the economy through the COVID-19 recession. 

The Fed’s future decision on the benchmark rate will hinge on whether inflation stays as tame as it has been in recent reports, Powell said. The Fed’s preferred measure of inflation showed prices growing 2.6% over the year in December after having spiked to over 7% in June 2022, well on its way down to the Fed’s goal of 2%.

“So we’re looking at continuation of the good data that we’ve been seeing,” Powell said.