In a widely anticipated decision, the Federal Reserve opted to keep interest rates unchanged at the conclusion of today’s Federal Open Market Committee (FOMC) meeting. The federal funds rate remains in the range of 5.25% to 5.50%, a 23-year high that has now persisted since July 2023. While investors and analysts had largely priced in a pause, the rationale behind the Fed’s decision reflects a complex balance of economic signals, inflation concerns, and a shifting labor market.
CHART: Fed Funds Rate Over Time
Inflation is Cooling—But Not Enough
At the heart of the Fed’s policy stance remains its dual mandate: maximum employment and stable prices. While inflation has declined significantly from its peak in 2022, recent data show signs of stickiness in core prices—particularly in housing and services. The Consumer Price Index (CPI) for March showed headline inflation at 3.5% year-over-year, still well above the Fed’s 2% target. Core inflation, which excludes volatile food and energy prices, remains elevated.
Fed Chair Jerome Powell emphasized in his post-meeting press conference that “while inflation has moved down from its highs, it remains too high, and we are prepared to maintain our restrictive stance until we are confident inflation is sustainably headed toward 2%.”
Labor Market Shows Signs of Softening
A key factor behind the decision to hold rates steady is the evolving labor market. The April jobs report showed signs of cooling, with job creation falling below expectations and the unemployment rate ticking slightly higher. Wage growth has also moderated, suggesting that the tightness that once fueled inflationary pressures may be easing.
The Fed appears to be watching closely to avoid tipping the economy into recession. Maintaining current rates gives policymakers the flexibility to respond to further labor market deterioration while continuing to restrain inflationary pressures.
No Immediate Rate Cuts on the Horizon
Despite growing calls from some quarters for rate cuts to support growth, Powell made it clear that the central bank is not yet ready to pivot. “We do not expect it will be appropriate to reduce the target range until we have greater confidence that inflation is moving sustainably toward 2%,” he noted.
Markets have been forced to recalibrate their expectations. At the start of the year, many anticipated as many as six rate cuts in 2024. That outlook has now dramatically shifted, with investors largely pricing in one or two cuts at most—and not before late 2025, barring a sharp economic downturn.
Global Considerations and Financial Stability
The Fed’s cautious approach is also influenced by global developments. Sticky inflation in Europe, geopolitical tensions, and persistent supply chain disruptions all contribute to uncertainty. Moreover, the central bank remains attuned to the risks of financial instability. Keeping rates high—but not raising them further—helps reduce the chances of asset bubbles or excessive credit growth while avoiding additional strain on borrowers.
What Businesses and Investors Should Expect
The Fed’s message today is clear: patience is the prevailing policy. For businesses, this means continued pressure on borrowing costs, but also stability in monetary conditions. For investors, the outlook is one of reduced volatility in Fed policy, though rates may stay “higher for longer” than many had hoped.
In the months ahead, the data will continue to guide the Fed’s hand. Inflation progress will be crucial, but so too will the health of the consumer and the resilience of the job market. Until then, the pause continues—but the path forward remains data-dependent.\