Fed holds interest rates steady at highest level since 2001

The Federal Reserve decided to hold its benchmark interest rate steady on Wednesday, postponing highly anticipated rate cuts as elevated inflation continues to burden U.S. households.

The announcement arrives days after new government data showed that the economy is cooling off.

The slowdown has coincided with a months-long stretch of stubborn inflation, putting pressure on the Fed to keep interest rates high despite a risk of hindering economic activity with expensive borrowing costs.

"The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks," the Federal Open Market Committee, the Fed's decision-making body on interest rates, said in a statement on Wednesday.

Due in part to a lack of recent progress in lowering inflation, the FOMC said it does not anticipate cutting interest rates until it retains confidence that inflation is moving sustainably downward.

"So far the data has not given us that greater confidence," Fed Chair Jerome Powell said at a press conference in Washington D.C. on Wednesday. "It is likely that gaining such greater confidence will take longer than previously expected."

In the run up to the Fed's decision, some observers raised the possibility of an interest rate hike in the coming months before the central bank moves forward with cuts. In his remarks on Wednesday, Powell downplayed the likelihood of such a move.

"It is unlikely that the next policy rate move will be a hike," Powell said.

At its previous meeting, in March, the Fed stuck to a projection of three rate cuts by the end of 2024, even as it opted to hold interest rates steady for the fifth consecutive time.

That approach has amounted to a prolonged pause of the aggressive rate hiking cycle that began roughly two years ago when the central bank sought to rein in rapid price increases.

Inflation has fallen significantly from a peak of 9.1% but it remains more than a percentage point higher than the Fed's target rate of 2%.

Interest rate cuts would lower borrowing costs for consumers and businesses, potentially triggering a burst of economic activity through greater household spending and company investment.

But 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.

The recent economic cooldown, meanwhile, could complicate the posture taken up by the Fed.

The U.S. economy slowed dramatically at the outset of 2024, though it continued to grow at a solid pace, according to data released by the U.S. Commerce Department last week.

Gross domestic product, a measure of all the goods and services produced in the economy, recorded 1.6% annual growth over the first three months of the year, the Commerce Department said this week.

That figure came in well below expectations, marking a steep slowdown from a 3.4% annual rate measured over the final quarter of last year.

In March, before the latest GDP data, Powell said a combination of elevated inflation and economic fortitude offered the Fed an opportunity to hold rates steady at highly elevated levels, since the central bank ran little immediate risk of triggering a downturn.

"On inflation, it's too soon to say whether the recent readings represent more than just a bump," Powell told a business conference at Stanford University.

"Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy," Powell added.

Economists who recently spoke to ABC News downplayed any alarm raised by GDP finding last week, saying resilient consumer spending continues to propel stable growth.

But, they added, the Fed could face a difficult position if a gradual cooldown persists alongside elevated inflation. That trend could force the Federal Reserve to keep interest rates high even as the economy falters.

The Fed Funds rate stands between 5.25% and 5.5%, matching its highest level since 2001.