Il Nuovo Postiglione - US Fed holds key rate steady, says March cut unlikely

The central bank has a dual mandate to keep both inflation and the unemployment rate low, and has been heavily focused at recent meetings on reining in inflation, with an eye on its long-term target of two percent.

The Fed confirmed in a statement that it was holding its benchmark lending rate steady at its 23-year high, between 5.25 and 5.50 percent.

It said the "risks to achieving its employment and inflation goals are moving into better balance."

But it added that the rate-setting Federal Open Market Committee (FOMC) is unlikely to start cutting interest rates "until it has gained greater confidence that inflation is moving sustainably" toward two percent.

"We believe that our policy rate is likely at its peak for this tightening cycle," Fed Chair Jerome Powell told reporters at a press conference after the rate decision.

He added that 'almost everyone' on the FOMC was in favor of a cut in 2024, but that a move as soon as the next meeting in March was unlikely.

"I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting," he said.

Wall Street stocks fell sharply on Wednesday afternoon as traders digested the news.

- 'Stunningly good' data -

Following a post-pandemic surge in inflation, fueled further by the Russian invasion of Ukraine, the Fed rapidly hiked interest rates to slow rising prices -- with surprising success.

The US central bank's favored inflation measure, which strips out volatile food and energy prices, has now fallen below an annual rate of 3.0 percent, while economic growth remained robust at 2.5 percent in 2023 and unemployment stayed close to historic lows.

Fresh data published ahead of the Fed's rate decision Wednesday from ADP showed that private sector hiring has cooled more than expected this month, further underscoring the Fed's progress.

"The economy is broadly normalizing, and so is the labor market," Powell told reporters.

- Cold water -

In its December rate meeting, the Fed raised its economic outlook for the year ahead, and signaled it expects as many as three quarter-percentage-point rate cuts in 2024, sparking optimism in financial markets that the central bank could cut rates as soon as March.

When the Fed lowers interest rates, US consumers get cheaper access to credit, meaning the cost of everything from car loans to mortgages falls, while company valuations see a boost.

Heading into this meeting, traders and analysts were divided between those who believed the first rate cut would come in March, and those who expected the Fed to tread more cautiously and move in May instead.

"We are not convinced the Committee will cut rates as soon as its next meeting on March 20 because it needs 'greater confidence' that inflation is moving back toward 2 percent on a sustained basis," Wells Fargo economists wrote in a note to clients after Powell's remarks.

Futures traders, who have oscillated over a possible March cut in recent weeks, moved firmly away from such an eventuality, according to AFP analysis of CME Group data.

They are much more confident of a May cut, assigning a greater-than-90 percent probability that the Fed will have a lower key lending rate by May 1 than it does now.

"There was nothing in the post-meeting statement that warrants a change to our forecast for the first rate cut to occur in May," Oxford Economics chief US economist Ryan Sweet said in a note to clients Wednesday.

A.Ferrara--INP