The Fed makes it very clear that it will not cut rates until inflation reaches 2%
The 2% inflation target is sacred, untouchable, taboo. The Federal Open Market Committee (FOMC) has kept rates unchanged in the 5.5%-5.25% range, which remains at 22-year highs. It has now held four meetings without moving rates.
And the Fed acknowledges that the risks to the achievement of its employment and inflation targets are balancing out. But the statement insists that "the economic outlook is uncertain and inflation risks remain on the downside".
For the first time in two years the Fed is closing the door on the possibility of a rate hike, but at the same time making it very clear that it will not lower rates until the 2% inflation target is reached. At the moment, it is already below 3%, something that has not been seen since the beginning of 2021.
Obsession with inflation
The Fed seems obsessed with lowering inflation without causing a recession, the famous soft landing. Something it has only achieved once in its century-long history. But now it is within reach: the US economy grew by 0.8% in the fourth quarter, 2.5% for the year as a whole, while inflation closed at 3.4%, compared with 7% in 2021 and 6.7% in 2022.
Fed chairman Jerome Powell stresses that the FOMC is not sufficiently confident that the battle against inflation is won: "It does not expect it would be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%".
"We believe that our policy rate has probably reached its highest level in this tightening cycle. And that if the economy evolves as expected, it will probably be appropriate to consider lowering it at some point this year. But the economy has surprised forecasters in many ways since the pandemic and ongoing progress towards our 2% inflation target is uncertain, and we remain very vigilant about inflation risks. We stand ready to maintain the current target range for the federal funds rate for longer if appropriate," Powell insists.
