Fed holds interest rates at 23-year high as inflation continues to push back timing of a rate cut | CNN Business

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• The Federal Reserve said Wednesday it will hold its key interest rate steady for the sixth-straight meeting.
•  Just six weeks ago, Fed Chair Jerome Powell and his colleagues penciled in three rate cuts this year. That now looks very much in doubt.
• A slew of hotter-than-expected economic data has given the Fed no reason to give the economy an assist by cutting rates after hiking them aggressively over the past two years.
• Questions had even begun to arise as to whether the economy is so hot that the Fed may need to return to rate hikes, but Powell dispelled that in his post-meeting press conference.
• US markets ended the day mixed Wednesday, with traders now betting that the first rate cut won't come until November but relieved that a rate hike appears to be off the table.

US markets closed mixed on Wednesday on a volatile day of trading.

Stocks spent the morning largely unchanged before jumping higher when Federal Reserve Chair Jerome Powell indicated during a press conference that policymakers believed it was unlikely that they they would raise rates again in this cycle.

Investors, however, were unable to sustain the rally and the S&P 500 and tech-heavy Nasdaq fell again to close the day lower.

The blue-chip Dow ended Wednesday higher by 87 points, or 0.2%. The S&P 500 fell by 0.3% and the Nasdaq was also down 0.3%.

Wall Street ultimately was unable to snap April's losing streak. All three major indexes closed out last month lower after five months of gains. The Dow notched its worst month since September 2022.

In earnings news, shares of chip stocks fell after Advanced Micro Devices, or AMD, issued a lackluster earnings report. Shares of AMD were down 9% on Wednesday. Shares of Super Micro Computer also slid, ending the day 14% lower. Nvidia fell about 4%.

As stocks settle after the trading day, levels might still change slightly.

The US unemployment rate has stayed below 4% for more than two years, a remarkable streak that hasn't been matched in decades.

But many economists thought the jobless rate would be well above 4% by now, given all the rate hikes aimed at slowing the economy to curb inflation. Well, it may only be a matter of time before the streak of a sub-4% unemployment ends.

What would that mean for the Federal Reserve? Not a whole lot, Fed Chair Jerome Powell said Wednesday.

As of last month's jobs report, the unemployment rate is at 3.8%. It would take a material weakening in the labor market to catch central bankers' attention and potentially cause them to consider cutting rates sooner.

A couple of tenths of a percentage point increase in the unemployment rate "would probably not do that," Powell said.

If you're carrying a lot of high-interest debt, the fact that the Federal Reserve once again did not cut interest rates at its Wednesday meeting may be disappointing, if not surprising.

But if you have any savings, the Fed's unwillingness to lower rates until it sees more consistent progress in inflation data has - and will continue to - put money in your pocket this year if you seek out federally insured accounts with the highest rates.

In 2023, savers made $315.4 billion in interest in deposit accounts, four times the $78.7 billion they earned in 2022, according to Lending Tree's DepositAccounts.com, which used data from the Federal Deposit Insurance Corporation in its calculations.

That's because, after so many years of paltry interest rates, the Fed's rate-hike campaign that began in 2022 made it possible for savers to earn inflation-beating yields on their US domestic deposits, including bank and credit union savings accounts, certificates of deposit and money market accounts.

At the same time, yields on Treasury bills have also been very competitive with the higher rates banks are offering and are equally low risk.

Read more here about how to grow your savings while the growing is good.

When asked whether the upcoming 2024 election may influence the Fed's interest policymaking decisions, Federal Reserve Chair Jerome Powell stressed the central bank's independence from politics.

The Fed chair said that mixing politics with the Fed's economic calculations would "reduce the likelihood we'd actually get the economics right."

"We're always going to do what we think the right thing for the economy is," Powell said. "That's what we do. We're not looking at anything else."

"I can't say it enough: We just don't go down that road," he added.

The latest gross domestic product report showing that economic growth slowed as inflation accelerated sparked concerns about stagflation, which is the combination of those two factors.

But Federal Reserve Chair Jerome Powell said those concerns are misguided.

"I was around for stagflation. It was 10% unemployment. It was high single-digits inflation and very slow growth," he said, referring to one of the worst bouts of stagflation that happened in the 1970s after a spike in oil prices during the Arab oil embargo.

Right now, economic growth is "pretty solid" and the Fed's preferred inflation gauge is under 3%, Powell said. "I don't see the stag or the 'flation."

US markets surged Wednesday afternoon after Federal Reserve Chair Jerome Powell indicated twice during a press conference that policymakers believed interest rate policy was already "restrictive" enough and that it was "unlikely" that they they would raise rates again in this cycle.

The Dow gained nearly 500 points, or 1.3%. The S&P 500 was up 1% and the tech-heavy Nasdaq was up 1.5%.

Leading up to the Federal Reserve's May meeting, a few officials have floated the need to potentially raise interest rates even higher to rein in inflation.

But Federal Reserve Chair Jerome Powell said Wednesday it's "unlikely that the next policy rate move will be a hike."

At the same time, he did not give any assurance of a rate cut this year, which investors continue to believe will occur, though their timetable has been pushed later into the year.

Powell reiterated that central bank policy decisions will depend on how the economy is evolving. At the last meeting, Fed officials' median projections called for three rate cuts this year.

When asked by a reporter if that would still be realistic given the Fed meets five more times this year, Powell responded, "I'm not really thinking of it that way." He said Fed officials still aren't confident inflation is sustainably heading back to the Fed's 2% target but said that when they do get that confidence, "rate cuts will be in scope."

Powell noted that his own "confidence in that is lower than it was" at previous meetings.

Yields on US Treasuries tumbled after the Federal Reserve announced its decision to leave interest rates unchanged. But that's likely not what's driving yields lower.

In the Fed's statement, it said it would be significantly slowing the pace at which it allows its holdings, namely US Treasuries, to mature without reinvesting them. That brought the yield on the 10-year Treasury note to fresh lows for the day.

US stocks, meanwhile, remained relatively unchanged following the announcement.

The blue-chip Dow was 157 points, or 0.4% higher. The S&P 500 was 0.1% lower and the tech-heavy Nasdaq remained flat.

The Federal Reserve just announced it is keeping interest rates on hold at a 23-year high.

Here's what Wall Street has to say:

• "We expect the downtrend in inflation has been delayed, not derailed. As for the Fed's balance sheet reduction, today's decision to taper quantitative tightening is a nod to liquidity considerations in the financial system, rather than a shift in direction," said Whitney Watson, co-chief investment officer at Goldman Sachs Asset Management.
• "[The Fed's] admission that there has been a lack of further progress confirms that imminent rate cuts are extremely unlikely. A pivot this year will require not just inflation stabilization, but convincing and durable evidence that the disinflation trend is back in play," said Seema Shah, chief global strategist at Principal Asset Management.
• "The delay in rate cuts will continue to affect the discretionary budgets of lower- and middle-income consumers. … Costs for daily goods and services like food and gas are still significantly higher when compared to pre-pandemic levels, keeping pressure on Americans' bank accounts," said Stephen Rich, chief executive at Mutual of America Capital Management.
• "The immediate market reaction saw yields fall to session lows as traders focused on the Fed's plan to slow the runoff of its balance sheet. …The runoff will mean less Treasury paper hitting the market over the next few months - the market is viewing this as dovish," said Rajeev Sharma, managing director of fixed income at Key Wealth.

The Federal Reserve announced Wednesday it is easing its grip on the economy by shrinking its massive, multitrillion-dollar balance sheet at a slower pace.

The central bank's main tool is its key interest rate, but it also uses its balance sheet to either help stimulate or slow the economy, and it's been doing the latter to fight inflation.

Starting in June, the Fed will let up to $25 billion in Treasuries from its portfolio mature each month without replacing them, down from $60 billion a month currently.

The Federal Reserve said Wednesday it is holding interest rates at their current levels, as hotter-than-expected inflation data continues to push back the timing of the first rate cut.

Fed officials have kept their benchmark lending rate at a 23-year high since July, after aggressively raising rates starting two years ago.

Officials have said they need to have enough confidence that inflation is under control before lowering borrowing costs, but the latest figures haven't given them that reassurance.

The Federal Reserve is throwing a wrench into the all-important spring homebuying season.

A few months ago, rate cuts, which would help lower mortgage rates, seemed like a sure shot by now as inflation continued to get closer to the Fed's 2% target month after month.

That progress has dissipated with multiple different inflation measures heating up again. That's left central bankers with few options other than keeping interest rates at their current multi-decade highs for even longer, or potentially even raising rates.

All that has caused the spring homebuying season to take a timeout — and could spell trouble for the remainder of the year.

"Higher rates are curtailing inventory," Zillow senior economist Nicole Bachaud told CNN. "Some owners who locked in low rates during the pandemic have been reluctant to sell and give up that low monthly payment, especially in the most expensive markets where mortgage costs are more sensitive to changing rates."

Read more here.

Federal Reserve Governor Michelle Bowman, arguably the central bank's most hawkish voice, recently said that she would favor a rate hike "should progress on inflation stall or even reverse."

Minneapolis Fed President Neel Kashkari last week floated the possibility of not cutting rates at all this year. He also said rate hikes are "certainly not off the table." But he said they aren't likely. Kashkari is not voting on monetary policy decisions this year.

Like Bowman and Kashkari, New York Fed President John Williams said rate hikes aren't part of his baseline outlook. But he said he's not even remotely considering a rate increase at the moment.

"I don't see any signs that we're not having the desired restricted effect on demand that's helping us achieve our goals," Williams said in early April. There are "definitely circumstances" that would merit raising interest rates, he added, such as inflation moving materially higher, but the current trajectory doesn't fit that, he said.

Williams, a top adviser to Fed Chair Jerome Powell, still believes it will be appropriate to cut rates later this year, but declined to specify the quantity and timing.

Boston Fed President Susan Collins said earlier this month: "Overall, the recent data have not materially changed my outlook, but they do highlight uncertainties related to timing, and the need for patience — recognizing that disinflation may continue to be uneven,"

Last month's shockingly strong job report — the economy added 303,000 jobs in March, blowing past expectations of 205,000 positions added — is more of a reason for the central bank to be patient with cutting rates, she said, adding that it may mean fewer cuts this year "than previously thought may be warranted." Collins, who isn't voting on policy decisions this year, said at the end of last year, when CPI was lower than it is currently, that more rate hikes weren't off the table.

For now, officials generally expect to cut rates at some point this year. Officials' latest economic projections show that they mostly expect to cut rates this year, though they were split on how aggressive the cutting should be, with 10 expecting three or more quarter-point cuts and nine estimating two or fewer.

Jamie Dimon is "quite upset about the state of affairs" in the US government.

"We need effective, competent government and the administrative state is extraordinarily bad now," Dimon, the CEO of JPMorgan Chase, the largest bank in the nation, said Tuesday at an event hosted by the New York Jobs CEO Council.

Dimon, speaking alongside New York City Mayor Eric Adams, said he's "not blaming either party yet" for dysfunction in the federal government.

But he asked: "What agency says, 'You gave me $50 billion. I said I was going to do x and here's what I did?'" He included the Federal Reserve in a list of government agencies that, according to him, don't share what they did with the funding it received. However, the Fed is unique in that it doesn't receive funding from Congress and is financed primarily through interest it earns on government securities.

When it comes to the economy, Dimon has recently expressed concerns that the Fed may not achieve a soft landing, a scenario where inflation is vanquished without raising unemployment levels.

Interest rate cuts have been the main focus for Wall Street ever since the end of last year, when Federal Reserve officials indicated they intended to lower rates. But stubborn inflation now has some investors wondering about the exact opposite: a rate hike.

Inflation slowed substantially in 2023 as the Fed lifted rates to nearly a quarter-century high and held them at that level since July. But recent economic data shows there hasn't been much improvement this year.

Then came March's Consumer Price Index report, which showed prices rose 3.5% last month from a year earlier, up considerably from February's 3.2% and higher than economists' expectations. That also marked the highest reading in half a year.

Surging gas prices and still-high housing costs drove the hotter-than-expected reading. The report spooked Wall Street, triggering a mass selloff on Wednesday and reducing the odds of a June rate cut, according to futures.

Still, most Fed officials have signaled that they plan to cut rates this year if the economy evolves as expected. But disappointing inflation readings like Wednesday's are likely giving them pause. And if the inflation situation worsens even further, the Fed may even have to consider raising rates.

After inflation rates tumbled throughout 2023, progress stalled in the first quarter of the year, which forced giddy investors who once priced in several rate cuts starting in the spring to re-calibrate their forecasts.

That reflects the proverbial "bumpiness" of inflation's journey back down to the central bank's 2% target, a point that Federal Reserve Chair Jerome Powell often makes.

The string of hotter-than-expected inflation readings was a rude awakening itself, but the latest data on US gross domestic product released last week also raised fears of stagflation, an economic phenomenon in which inflation is high but growth deteriorates.

The Fed remains squarely focused on fighting inflation, though, since the job market is currently one of the strongest in history with unemployment still under 4%. The central bank is tasked by Congress to stabilize prices and maximize employment.

"We believe that if inflation continues to remain persistent through May, it is unlikely we will see a rate cut until July or September," Kathleen Grace, managing member and chief executive of Fiduciary Family Office, said in a note Monday.

The Labor Department releases April data gauging the state of the US labor market on Friday, including monthly payroll growth, wage gains and the unemployment rate.

It's anyone's guess as to when the Federal Reserve will begin to cut interest rates this year — if at all.

Fed officials are widely expected to announce Wednesday that they intend to hold rates steady for the sixth straight meeting. But analysts are hoping for some much-needed clarity on what to the expect from the central bank in the coming months.

That guidance will be key for market observers who clearly have divergent views on interest rates. Forecasts from major Wall Street banks on the first rate cut are all over the place: JPMorgan and Goldman Sachs expect the first cut in July, while Wells Fargo is betting on September. Bank of America doesn't expect the first cut until December. Some Fed policymakers, meanwhile, have even floated the possibility of a rate hike, instead of a cut.

According to the futures market, Wall Street's best bet on the first cut is September — and not by a lot. There is currently a roughly 44% chance of the Fed cutting rates in September versus a 42% chance of another pause, the CME FedWatch Tool shows. The odds of an initial cut in November are a bit lower.

"Right now, everybody seems to be just throwing a dart and saying when they think they're going to start cutting rates," Liz Ann Sonders, chief investment strategist at Charles Schwab, told CNN in an interview last week.

Wednesday's Federal Reserve policy decision will likely be pretty boring for investors — officials are widely expected to keep interest rates the same, just as they have since July 2023.

But some savvy traders are getting excited about another key decision.

They think that the Fed may curtail its quantitative tightening (QT) program — that's the selling off of its assets to decrease money supply and increase interest rates.

The Fed bought a ton of government-backed bonds between 2020 and 2022 to help support economic recovery after the pandemic-induced recession. Those purchases ended up pushing down interest rates in certain parts of the economy, like housing and auto sales.

In mid-2022, as inflation soared higher, the Fed reversed that and began unloading those bonds.

The Fed currently lets up to $60 billion in Treasuries mature each month without replacing them, reducing the amount of money circulating in the economy. The idea is that QT can help exert some downward pressure on prices.

But there's also some downside to the practice — changing the amount of liquidity in the economy and redirecting that money could have some major consequences.

Read more here.

Labor demand cooled more than expected in March, as the number of job openings in the US fell to their lowest level in more than three years, according to Bureau of Labor Statistics data released Wednesday.

US employers had an estimated 8.49 million available jobs, according to the BLS' Job Openings and Labor Turnover Survey (JOLTS) report released Wednesday. Economists were expecting 8.67 million openings, a lower total than the 8.81 million recorded for February.

There are now 1.3 jobs for every job seeker. During the pandemic recovery, that ratio hovered at around 2 to 1.

In February 2020, openings were just shy of 7 million.

The Federal Reserve believes that more slack in the labor market can help in the fight to bring down inflation. When there's an imbalance in the supply and demand for workers, it could cause wages to rise and, in turn, prompt companies to raise prices.

To that end, one particular JOLTS metric has risen in importance to the Fed and economists alike: The quits rate, which dipped to 2.1%, its lowest level since August 2020.

Higher quit rates are both signs of worker confidence in the labor market as well as a potential source of inflation, as job-switching typically can result in a bigger pay bump. Wage gains have cooled from their pandemic-era spikes; however, they remain above historical averages and what the Fed would like to see.

Hiring activity pulled back as well in March, with an estimated 5.5 million hires versus 5.78 million the month before.

Layoff activity, however, remains low. Those dropped to 1.53 million in March, landing at their lowest level since December 2022.

US markets opened mixed, as investors look to end their April selloff and begin May on a stronger note.

Traders, meanwhile, are waiting for the next Federal Reserve policy decision and digesting the latest corporate earnings figures.

The blue-chip Dow gained 25 points, or 0.1%. The S&P 500 dropped 0.2% and the tech-heavy Nasdaq Composite was flat.

Fed officials are widely expected to announce this afternoon that they are keeping interest rates at their current levels. Rates have remained steady since July 2023 and Wall Street is unsure about when cuts could finally come.

Shares of Starbucks, meanwhile, fell 15.1% after the company cut its outlook and announced disappointing sales numbers. Shares of CVS Health also fell 18.2% after the company missed on earnings.

Chipmaker AMD dropped 4.8% after reporting revenue that came in below expectations.

Hiring activity was stronger than expected in the US private sector last month, according to payroll processor ADP's latest employment estimates.

Employers added 192,000 jobs in April, down from March's job gains, (which were upwardly revised by 24,000 to 208,000 jobs) according to ADP's national employment report released Wednesday. However, economists were anticipating a net gain of 175,000 jobs, according to FactSet consensus estimates.

The job growth was broad-based, ADP noted. All large industries recorded gains, except for the tech-laden information sector, which lost an estimated 4,000 jobs.

While job growth has accelerated to start the year, wage gains are showing a continued moderation, according to the report.

Annual pay was up 5%, a slight deceleration from March's 5.1% increase. The pay bumps for job changers dropped to 9.3% from 10.1% but remain higher than where they started the year.

The ADP report is an independent measure of employment trends and is developed using anonymized and aggregated payroll data from its clients.

While ADP's tabulations don't always correlate with the official federal jobs report — which is due out Friday — it's sometimes viewed as a proxy for overall hiring activity.

US stock futures fell Wednesday morning following a broad selloff Tuesday.

April was a bad month overall for markets, with all three major indexes closing out April lower, snapping a five-month streak of gains. The blue-chip Dow notched its worst month since September 2022.

The prospect of another decision by the Federal Reserve to hold interest rates didn't appear to buoy the spirits of investors on Wednesday morning.

Dow futures fell 82 points, or 0.2%, S&P 500 futures were 0.4% lower and Nasdaq Composite futures were down by 0.6%.

The Federal Reserve announces its latest interest decision Wednesday afternoon, with a press conference led by Chair Jerome Powell to follow.

Here's what Wall Street will be watching:

• "The Fed's hawkish pivot is probably being overplayed," said Scott Helfstein, head of investment strategy at Global X. "December looks like the most reasonable meeting to expect a rate cut, unless an emergency situation arises. July is on the table, but decent growth and modest inflation probably warrant a pause until after the election."
• "The upside surprise in [the Employment Cost Index] will make it more difficult for Powell to stick to the view that normalization in the labor market is progressing as indicated by measures of tightness, such as quits and vacancies. … Nonetheless, we expect a measured reset not a hawkish scramble," wrote Evercore ISI strategists.
• An "important consideration will be plans for tapered quantitative tightening (QT), or the process of the Fed allowing Treasuries and mortgage-backed securities to roll off their balance sheet without replacing them at a more subdued pace. Powell is especially attentive to these liquidity risks," wrote José Torres, senior economist at Interactive Brokers.
• "Given the recent economic reports, I think we will be lucky to get one rate cut this year," said Eric Sterner, chief investment officer at Apollon Wealth Management. "I highly doubt that Powell will give any indication that another rate hike is possible."

Stocks just wrapped up a rough month.

All three major indexes declined in April, marking their first monthly losses since October 2023. The Dow tumbled 5%, notching its worst month since September 2022. The S&P 500 slid 4.2% and the Nasdaq Composite lost 4.4%.

Behind the selloff? A spate of hotter-than-expected inflation data, a blowout jobs report and a slowdown in gross domestic product has led Wall Street to push out its bets on when the Federal Reserve will begin cutting interest rates.

Traders now expect that the central bank will start easing rates in the second half of 2024. At the beginning of the year, investors wagered that the Fed would cut rates as many as six times starting in March.

Inflation remained stubbornly high last month, but it hasn't stopped Americans from spending.

The Personal Consumption Expenditures price index — a closely watched inflation gauge favored by the Federal Reserve — accelerated to 2.7% for the year ended in March, according to data released Friday by the Commerce Department.

That rate was above economists' expectations for a 2.6% gain and landed above February's reading of 2.5%.

On a monthly basis, prices rose 0.3%, unchanged from the pace seen in February.

"We're moving in the wrong direction, again, on the inflation story," Ben Ayers, Nationwide's senior economist, told CNN in an interview.

Inflation has cooled significantly from the decades-high levels seen in the summer of 2022; however, progress that was made last year did not continue into 2024. While rising gas prices played their role, the biggest bogeyman to lower inflation has been shelter costs and overall services, where price hikes tend to be more "sticky."

"Those [price increases for services] don't go away overnight, and I think that's the concerning part for us as economists, but also for the Fed," Ayers said. "That means a longer road for this higher inflationary environment over this year than we thought."

Compared to last spring when Silicon Valley Bank, Signature Bank and First Republic Bank all collapsed, the banking industry is in great standing. But that doesn't mean everything is going well across the board.

On Friday, Republic First Bank (unrelated to First Republic Bank) was shuttered by Pennsylvania state regulators, marking the first bank failure of the year. With $6 billion in total assets and $4 billion in total deposits as of the end of January, Republic First Bank is a considerably smaller bank compared to SVB, Signature and First Republic. That's likely why it isn't having a spillover effect.

That said, the problems it faced that contributed to its failure were similar to those three banks in that it relied heavily on uninsured deposits and wasn't properly managing interest rate risks.

Recently, New York Community Bank has also come under pressure as customers began pulling their cash from the regional lender after it said it had identified "material weakness" in the company's controls. The bank got a $1 billion equity investment lifeline from investors, including former Treasury Secretary Steven Mnuchin's firm, Liberty Strategic Capital, in March.