Federal Reserve: Fed holds, says inflation has eased, still elevated

“We’re not looking for inflation to tap the 2 per cent base once, we’re looking for it to settle out over time at 2 per cent.

“If we get very strong inflation data and it kicks back up, then we’ll go slower or later,” he said.

Financial markets had priced in a 57 per cent chance of a quarter point rate cut in March, but that dropped to 34 per cent after Mr Powell’s press conference, according to the CME’s FedWatch Tool.

The US 10-year bond yield bounced around as Mr Powell spoke, landing at 3.98 per cent, about where it started before the Fed’s statement was released.

Earlier, the US central bank’s latest policy statement said the policy-setting Federal Open Market Committee “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 per cent”, the Fed’s inflation target.

The central bank said the economic outlook was “uncertain”, although economic activity “has been expanding at a solid pace”. Job gains “remain strong, and the unemployment rate has remained low”.

“If we saw an unexpected weakening in the labour market, that would certainly weigh on cutting sooner,” Mr Powell said.

Oxford Economics chief US economist Ryan Sweet said the Fed was being cautious about inflation because most of the improvement had come in goods, not services, and the central bank wanted to make sure both were coming down.

“Though inflation has slowed significantly, the Fed’s reference to the need for more confidence is a nod to the source of disinflation, which has been concentrated in goods,” he said in a note.

“Fed officials are waiting for more evidence that disinflationary pressures are broadening and intensifying in the stickier components of inflation, particularly core services inflation excluding housing,” Mr Sweet said.

The Fed’s preferred measure of inflation – the Personal Consumption Expenditures (PCE) index – is currently 2.6 per cent.

The latest statement, which left the Fed’s benchmark overnight interest rate in the 5.25 per cent-5.50 per cent range, was approved unanimously.

While the statement stopped short of steering investors and the public towards the timing and pace of coming rate cuts, it did mark the current policy rate as the peak of an aggressive monetary tightening cycle that began in March 2022, when price pressures were ramping up. Inflation peaked at a 40-year high several months later.

The Fed said risks to meeting both the employment and inflation goals “are moving into better balance”, ending roughly two years in which the central bank’s bias has been to moving rates higher and the risks seen as tilted towards those posed by escalating prices.

Fed officials did not issue new economic projections at their meeting this week. As of the December 12-13 meeting, policymakers envisioned cutting the policy rate by 75 basis points over the course of this year, but they have been reluctant to commit to a start date until there is more data showing inflation has continued its downward trajectory.