Federal Reserve officials left interest rates unchanged and signaled that they are wary about how stubborn inflation is proving, paving the way for a longer period of high interest rates.
The Fed held borrowing costs steady at 5.33 percent on Wednesday, leaving them at a more than two-decade high where they have been set since July. Central bankers reiterated that they need “greater confidence” that inflation is coming down before reducing rates.
“Readings on inflation have come in above expectations,” Jerome H. Powell, the Fed chair, said at a news conference following the release of the central bank’s rate decision.
The Fed stands at a complicated economic juncture. After months of rapid cooling, inflation has proved surprisingly sticky in early 2024. The Fed’s preferred inflation index has made little progress since December, and although it is down sharply from its 2022 highs, it remains well above the Fed’s 2 percent goal — calling into question how soon and how much officials will be able to lower interest rates.
“What we’ve said is that we need to be more confident” that inflation is coming down sufficiently and sustainably, Mr. Powell said. “It appears that it’s going to take longer for us to reach that point of confidence.”
The Fed raised interest rates quickly between early 2022 and the summer of 2023, hoping to slow the economy by cooling demand. Higher Fed policy rates trickle through financial markets to push up mortgage, credit card and business loan rates, which can cool both consumption and company expansions over time.
But Fed policymakers stopped raising rates last year because inflation had begun to come down and the economy appeared to be cooling, making them confident that they had done enough. They had expected to make three interest rate cuts in 2024 as recently as March. Now, though, inflation’s recent staying power has made that look less likely.
Many economists have begun to push back their expectations for when rate reductions will begin, and investors now expect only one or two this year. Odds that the Fed will not cut rates at all this year have increased notably over the past month.
Mr. Powell made it clear on Wednesday that officials still think that their next policy move is likely to be a rate cut and said that a rate increase is “unlikely.” But he demurred when asked whether three reductions are likely in 2024.
He laid out pathways in which the Fed would — or would not — cut rates. He said that if inflation comes down or the labor market weakens, borrowing costs could come down.
“If we did have a path where inflation proves more persistent than expected, and where the labor market remains strong, but inflation is moving sideways and we’re not gaining greater confidence, well that could be a case in which it could be appropriate to hold off on rate cuts,” Mr. Powell said.
Investors responded favorably to those comments: Stocks rose and bond yields fell as Mr. Powell was speaking.
A longer period of high Fed rates will be felt from Wall Street to Main Street. Key stock indexes fell in April as investors came to expect a longer stretch of elevated borrowing costs, and mortgage rates have crept back above 7 percent, making home buying pricier for many want-to-be owners.
But Fed officials are planning to keep rates high for a reason: They want to be sure to stamp out inflation fully to prevent quickly rising prices from becoming a more permanent part of America’s economy. Inflation has cooled sharply from its 2022 peak of 7.1 percent, but at 2.7 percent, it is still well above the Fed’s 2 percent goal.
Policymakers are closely watching how inflation data shape up as they try to figure out their next steps. Economists still expect that price increases will start to slow down again in the months to come, in particular as rent increases fade from key price measures.
“My expectation is that we will, over the course of this year, see inflation move back down,” Mr. Powell said on Wednesday. But he added that “my confidence in that is lower than it was because of the data that we’ve seen.”