The Fed is keeping interest rates steady and isn't quite ready to cut them yet.

Federal Reserve officials kept interest rates at their highest levels in more than two decades at their first meeting of 2024 and hinted that their next step will be to lower borrowing costs — even as policymakers made clear they are not yet ready to to implement that reduction.

Federal Reserve Chairman Jerome H. Powell said the country had had “six good months” of moderating inflation, but officials wanted to see further progress before cutting rates.

“We believe that our policy rate is likely at its peak for this tightening cycle, and that if the economy develops broadly as expected, it will likely be appropriate to start easing policy moderation sometime this year,” he said. Mr Powell. He added that when it comes to gaining enough confidence to bring down borrowing costs, “we want to see more good data.”

Mr. Powell said he did not think it was “likely” that Fed officials would have enough evidence to cut rates with their own policies. next meeting on March 19-20. That could have investors looking forward to later meetings – such as meetings in May and June – as they wonder when the first rate cut could come.

Wall Street had been hoping for upcoming rate cuts, and stock prices fell after the Fed meeting and Mr. Powell's comments. Investors increasingly expect financing costs to remain unchanged in March.

Central bankers are trying to keep their options open as they try to strike a delicate balance. They don't want to keep interest rates too high for too long, crushing growth. At the same time, they do not want to cut interest rates prematurely, which would risk a revival in demand, which could keep inflation high.

“The bottom line is that they are still unsure about the situation,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “There will be cuts. It is a matter of when, not if.”

The Fed's key interest rate is at a range of 5.25 to 5.5 percent, a sharp increase from near zero in March 2022. High interest rates are intended to suppress economic demand by making it more expensive to borrow money. borrow to buy a house. or buy a car or expand a business, and officials believe their current stance is high enough to meaningfully weigh on growth.

That's why policymakers have kept interest rates steady since July 2023 to see how their policies affect the economy — and they've received some good news in recent months. Inflation has fallen rapidly, even as the labor market remains solid and overall growth remains strong. That has fueled hopes that the economy could make a “soft landing,” one in which inflation returns to a normal pace without a painful recession.

Now Fed officials remain flexible in their efforts to achieve that goal.

“We know that reducing policy restraint too early or too much could result in a reversal of the progress we have seen on inflation,” Powell said during his news conference. “At the same time, reducing policy too late or too little could unnecessarily weaken economic activity and employment.”

While trying to find a balance, the Fed avoids committing to any set plan.

If inflation were to rise faster than expected, “then we will move slower, or later, or both,” Mr. Powell said. Good inflation data “would tell us we could go sooner, and maybe faster.”

The Fed's latest economic forecast, released in December, projected that officials could cut borrowing costs by three-quarters of a percentage point over the course of 2024. Policymakers will release a new set of these interest rate and economic forecasts when they meet in March. an update on whether they still think cuts of that magnitude are likely to be appropriate.

The resilience of the US economy has surprised many forecasters since the Fed's latest estimates. Consumers continue to spend at solid levels, overall growth exceeded expectations by the end of 2023, and the labor market continues to move forward.

At the same time, the labor market is showing some signs of recovery after a period of red-hot hiring. The vacancies are lower than before. Wage growth has slowed somewhat.

And strong demand has been accompanied by a steady slowdown in price increases. The consumer price index, a measure of inflation, peaked at 9.1 percent in the summer of 2022, but now it is only 3.4 percent. That's still faster than the roughly 2 percent that is typical, but recent progress has been steadier than many economists expected.

Fed policy tries to cool inflation by slowing the economy. That's why some economists had speculated that strong growth could prompt officials to keep interest rates high for longer. But Powell emphasized Wednesday that the Fed is not looking to weaken the economy and labor market as long as price increases continue to cool.

“We are not looking for a weaker labor market,” Mr. Powell said. “We expect inflation to continue to fall, just as it has fallen over the past six months.”

Still, risks to inflation remain, including some that could surface before the Fed's next meeting.

This will include adjustments to the consumer price measure released on February 9 which could make progress toward cooling inflation look better or worse than initial reports. Economists are still waiting for a widely expected slowdown in housing-related inflation to fully materialize.

Global forces can also drive up prices. For example, geopolitical turmoil in the Middle East could hamper healing supply chains or push up gas prices if it persists or worsens.

Such threats are enough to keep the Fed from declaring inflation defeated. Mr. Powell noted that he was more concerned about inflation rising above normal than an outright acceleration, but that policymakers are alert to all risks.

Still, the overall tone of both the Fed statement and the news conference was unquestionably optimistic, with Mr. Powell embracing strong growth, praising continued gains in the labor market and expressing hope that the return to normal inflation would continue.

When asked if he was prepared to say the economy had achieved a “soft landing”, he stopped short of saying so – but also hinted that the target was in sight.

“Certainly, I am encouraged – and we are encouraged – by the progress,” he said. “But at this point we are not announcing a victory at all.”