It looks like the Federal Reserve has finished raising interest rates, at least through its next meeting in June.
As expected, the Fed raised the federal funds rate 25 basis points Wednesday to a range of 5%-5.25%, a 16-year high. The Fed seeks to drive inflation down to 2% from the 4.2% total for its favored price indicator in the 12 months through March.
DON’T MISS: Fed Opens Door to Rate Pause After 10th Straight Hike
But the central bank also changed the wording of its policy statement Wednesday to indicate a likely pause in its rate-hike campaign.
Now the statement reads, “In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, …”
The previous statement (from March) gave a stronger nod toward increasing rates.
It read, “The [Fed] anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In determining the extent of future increases in the target range, …”
Significant Wording Change
Fed Chairman Jerome Powell made it clear that the wording change is significant. He was asked in a press conference after the Fed’s decision whether the statement indicated the Fed is likely to pause its rate hikes at the June meeting.
“That’s a meaningful change that we’re no longer saying that we ‘anticipate’” more rate rises, Powell said. “So we’ll be driven by incoming data, meeting by meeting, and we’ll approach that question at the June meeting.”
The Fed has raised interest rates at 10 straight meetings since March 2022, when the fed funds rate was zero to 0.25%.
While inflation is falling, employment data is mixed. The economy added 236,000 jobs in March, with unemployment at a measly 3.5%. But job openings slipped for a third straight month in March, to 9.59 million from 10 million in February.
Rate-Cut Pivot?
With the economy slowing -- GDP growth totaled only 1.1% annualized in the first quarter -- many investors anticipate the Fed will pivot to rate cuts in coming months.
The positions of interest-rate traders indicate a 60% probability that the Fed will send the fed funds rate back down to at least 4.25%-4.5% by year-end.
“After today’s meeting, investors have likely seen the peak fed funds rate,” said Jeffrey Roach, chief economist for LPL Financial brokerage firm. “The risks of inflation and growth are becoming more balanced.”
Looking forward, “as inflation further decelerates and the job market cools, investors should anticipate some rate cuts in the latter half of the year,” Roach said.
