The U.S. Federal Reserve is widely expected to hold interest rates steady when its policy-setting committee concludes its two-day meeting on Wednesday. This would keep the federal funds rate, which dictates the cost of borrowing money overnight between banks, in a target range of 5.25-5.50%, already the highest since early 2001.
The Fed embarked on an aggressive rate-hiking campaign in March 2022 in response to surging inflation that pushed prices up by 9.1% in June, the highest in over 40 years. Since then, inflation has cooled significantly, declining to 6.4% in January thanks to improving supply chains and slower consumer demand.
While inflation remains well above the Fed’s 2% target, the significant deceleration has led markets to predict the central bank will pause further rate hikes as it tries to achieve a “soft landing” for the economy. Traders see a 99% probability of rates remaining unchanged at this week’s Federal Open Market Committee (FOMC) meeting, according to CME Group data.
Continued economic strength supports holding rates steady. Unemployment remains low at 3.4% in January as employers added over half a million jobs. Consumer spending also remains resilient, suggesting the economy can withstand higher borrowing costs.
Fed officials have signaled rates may need to stay elevated for some time to ensure inflation continues descending toward the 2% goal. But expectations for the peak rate have declined from around 5% last year to the current level. Policymakers will update their forecasts this week, potentially revising growth higher and the unemployment rate lower to reflect recent data.
While the Fed is ready to hit pause on hikes, officials emphasize they will continue monitoring data closely and stand ready to adjust policy as needed. Any hints from Fed Chair Jerome Powell at his post-meeting press conference about potential rate moves at coming meetings will be closely parsed.
For now, with inflation clearly on a downward trajectory and the economy expanding moderately, the Fed looks ready to transition to a more data-dependent, meeting-by-meeting approach on rates after the most aggressive tightening in decades. This reprieve could give businesses and consumers some relief after a year of rapid increases in borrowing costs.
