Fed Holds Rates Steady, Still Sees Three Interest-Rate Cuts This Year | WSJ

Federal Reserve's Commitment to Price Stability and Maximum Employment

• The Federal Reserve is committed to bringing inflation down to its 2% target while maintaining maximum employment.
• Despite recent high inflation readings, the Fed's mandate remains focused on maximum employment and price stability.

Fed's Response to Inflation and Economic Outlook

• Inflation has eased but remains above the target, and the labor market is still tight.
• The Fed decided to keep interest rates unchanged and continue reducing its securities holdings.
• The economic outlook is uncertain, and the Fed is prepared to adjust its policy stance if necessary.

Fed's Approach to Policy Adjustments

• Fed Chair Powell says the test for making the first change to interest rates does not require them to be "terribly comfortable" that inflation is at 2% because rates are well above neutral.
• Powell emphasizes that the risks of easing too much or too soon are two-sided, and the Fed wants to be careful in its approach.
• Powell does not provide specific guidance on the timing of future rate decisions, stating that they will depend on ongoing data assessment and the evolving outlook.

Fed's Projections and Considerations

• The Fed's projections show a modest increase in the neutral rate and higher rates in the longer run, but Powell says it's uncertain whether rates will return to the very low levels seen before the pandemic.
• Powell acknowledges that the higher year-end inflation projection reflects recent data but emphasizes the need for more data to confirm disinflation.
• A weakening in the labor market could be a consideration for rate cuts, but continued strength in hiring and labor supply growth would not necessarily be reasons to hold off on rate cuts.

Fed's Assessment of Financial Conditions and Inflation

• Powell views current financial conditions as weighing on economic activity, particularly evident in the cooling off of demand in the labor market.
• The Federal Reserve is monitoring recent inflation data and acknowledges the bumpy path of inflation.
• The Committee is cautious in determining whether the recent inflation increases are temporary or a more secular turn.

Fed's Approach to Balance Sheet Reduction

• The Fed is considering slowing the pace of asset runoff, particularly in Treasuries, but specific details and timing have not been determined.
• The Federal Reserve is considering slowing down the pace of its balance sheet reduction to avoid liquidity problems and market turbulence.
• The Fed aims to achieve a smoother transition to a smaller balance sheet by carefully monitoring money market conditions and various indicators.

Fed's Transparency and Communication

• The Federal Reserve has been moving towards greater transparency over the past 30 years, with regular press conferences and various reports.
• The Fed Chair does not believe there is a desperate need for further transparency at this time.

Fed's Data-Dependent Approach to Rate Cuts

• The Fed is data-dependent and will assess incoming inflation data, including wage growth, to determine when it can confidently cut interest rates.
• Despite recent inflation data, the Fed Chair still believes the committee needs more evidence to build confidence that inflation is moving down sustainably towards the 2% goal before considering rate cuts.
• The Fed Chair acknowledges the progress made in reducing inflation but emphasizes the need for confirmation that this progress will continue.
• The Fed will closely monitor upcoming inflation data and welcome positive developments.