Fed holds interest rates steady at 23-year high

The Federal Reserve decided to hold its benchmark interest rate steady on Wednesday, prolonging an aggressive fight against inflation despite fresh data hours earlier that showed a slight cooldown of price increases.

Price increases eased last month, U.S. Bureau of Labor Statistics data showed, but progress on inflation has remained modest since late last year. In turn, the central bank said on Wednesday that it expects inflation to remain higher for longer than previously anticipated.

The Fed retreated from its previous forecast of three rate cuts this year, instead saying that it anticipates one rate cut in 2024.

"The 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 percent," The Federal Open Market Committee, the Fed's decision-making body on interest rates, said in a statement.

At a press conference in Washington, D.C. on Wednesday, Fed Chair Jerome Powell applauded the latest inflation data but said the central bank will need to see further progress before it reduces interest rates.

"We welcome today’s reading and hope for more like that," Powell said. "We’ll need to see more good data to bolster our confidence that inflation is moving sustainably down to 2%."

At seven consecutive meetings spanning nearly a year, the Fed has opted to hold rates steady in response to elevated inflation and robust economic performance.

In theory, the prolonged stretch of high interest rates should weigh on economic activity, reduce consumer demand and cut prices. Instead, a resilient economy and stubborn inflation have largely defied the Fed's efforts.

Inflation has fallen significantly from a peak of 9.1%, but price increases have barely budged in recent months and remain more than a percentage point higher than the Fed's target rate of 2%.

The Fed has all but abandoned a previous forecast of three interest rate cuts by the end of the year.

Some observers expect the Fed to forgo interest rate cuts for the remainder of 2024.

Roger Aliaga-Diaz, chief economist at the investment giant Vanguard, said in a statement to ABC News before the rate announcement that he believed the Fed would keep interest rates at current levels for at least the next six months.

The forecast, Aliaga-Diaz added, owes to "inadequate progress in the inflation fight and continued growth and labor momentum."

In a note to clients, Deutsche Bank echoed skepticism about rate cuts anytime soon. "Fed officials have clearly signaled that they are in a wait-and-see mode with respect to the timing and magnitude of rate cuts," the note said.

The Fed risks a rebound of inflation if it cuts interest rates too quickly, since stronger consumer demand on top of solid economic activity could lead to an acceleration of price increases.

A prolonged period of high interest rates, however, threatens to place downward pressure on economic growth and plunge the U.S. into a recession.

A jobs report released on Friday blew past economist expectations, demonstrating the resilient strength of the economy. Blockbuster hiring in May exceeded the average number of jobs added each month over the previous year, the U.S. Bureau of Labor Statistics said.

Average hourly wages surged 4.1% over the year ending in May, the report found. That rate of pay increase exceeds the pace of inflation, indicating that the spending power of workers has grown even as prices jump.

The data marks a boon for workers but could give pause to policymakers, since they fear that a rise in pay could prompt businesses to raise prices in order to cover the added labor cost.

Economic output slowed markedly at the outset of 2024, though it continued to grow at a solid pace.

While the Fed has resisted lowering interest rates, consumers have faced high borrowing costs for everything from mortgages to credit cards.

The average rate for a 30-year fixed mortgage stands at 6.99%, according to Freddie Mac data released last week.

When the Fed imposed its first rate hike of the current series in March 2022, the average 30-year fixed mortgage stood at just 3.85%, Freddie Mac data showed.