The Fed’s Path Ahead is Murky—Here Are 3 Things Chair Jerome Powell Is Certain About

The Federal Reserve’s policy committee decided to keep the influential fed funds rate at a 23-year high Wednesday as officials at the central bank seek more evidence that inflation is under control before embarking on rate cuts that have been eagerly anticipated by investors and consumers alike.

Previously, officials at the Fed thought they could let up on rates that are putting the housing market in a gridlock and making it more expensive to borrow money to buy cars and other large purchases. However, stubborn price growth has reignited, and in reaction, Fed officials have said in recent weeks that rates need to stay higher for longer—without specifying a timeline.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” officials said in a statement Wednesday after their latest policy meeting concluded.

Chair Jerome Powell further elaborated on the economic and interest rate outlook in his regular press conference following the announcement of the Fed’s decision. Here are some key takeaways.

Inflation Could Still Come Down This Year

Powell and other Federal Reserve officials have said repeatedly they’re looking for “greater confidence” that inflation is on a path down to their goal of a 2% annual rate before they’ll cut the fed funds rate.

The data so far this year hasn’t instilled that confidence. In fact, when Powell discussed the inflation outlook, he was clear that the data this year has made him less confident about inflation’s downward trajectory, although he still thinks it’s likely to fall.

“My expectation is that we will, over the course of this year, see inflation move back down. That’s my forecast,” he said to reporters in his press conference. “My confidence in that is lower than it was because of the data that we’ve seen.”

The reason for Powell’s continued belief in disinflation: The housing market, where rent increases have cooled off, which is likely to help push inflation down in the months ahead, economists say.

Bottom line: There’s still hope that inflation could fall this year and the Fed could cut rates as it gains more confidence it will reach the committee’s goal.

Rate Hikes Are Unlikely Any Time Soon

While Powell downplayed the possibility of rate cuts any time soon, rate hikes don’t seem to be in the cards either. 

“I think it’s unlikely that the next policy rate move will be a hike,” Powell said in answer to a question.

Powell’s remark contrasts with Michelle Bowman, who is a Fed Governor and voting member of the Fed’s policy committee. Earlier this month, Bowman raised the possibility of hiking the fed funds rate again in response to inflation that stubbornly resisted falling in the first quarter.

The Fed hasn’t touched its fed funds rate since last July, when it capped off a rate-hike campaign that began in March 2022 by raising it for an 11th time to its highest since 2001.

Bottom line: While inflation has been stubborn, the Fed thinks its current pressure on the economy is sufficient to suppress price growth.

Stagflation Isn’t An Imminent Threat

Federal Reserve chair Jerome Powell waved away concerns that the U.S. economy is in a state of stagnation while having too high inflation, a doomsday economic scenario known by the portmanteau “stagflation.”

When asked about such a possibility by a reporter, Powell pointed out that inflation is far lower than in the infamous episode of stagflation in the 1970s, while unemployment is near historic lows.

“I don’t see the stag or the flation, actually” he said.

Fears of stagflation were stoked last week when the first quarter gross domestic product report showed economic growth weakening and inflation higher than economists predicted.

However, the economy seems to continue to run hot in several areas. Wages continue to grow, home prices are hitting record highs, and jobs remain plentiful—leaving little incentive for the Fed to cut interest rates to prevent the economy from falling into a recession.

Bottom line: There are no recessionary signs on the horizon that would drastically shift the Fed’s wait-and-see approach on the horizon.