The Federal Reserve left its key interest rate unchanged at between 5.25% and 5.5% — the highest level in more than a decade — as annual inflation rates continued to stall.
In its statement announcing the hold, the central bank said that in recent months, there had been "a lack of further progress" toward its 2% percent inflation goal.
"Economic activity has continued to expand at a solid pace," it said. "Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated."
Last month, the consumer price index came in at 3.5% on an annual basis, driven by rising housing costs and insurance rates, especially auto insurance.
"We're just a mile a way from the finish line," said Mark Zandi, chief economist at Moody's, referring to the economy reaching 2% inflation. "We're very close, but still not there. I do think that inflation will continue to moderate."
The Fed has sought to slow inflation by keeping interest rates elevated. By making it more expensive for businesses and consumers to borrow money, including through credit cards, the Fed hopes to reduce demand for goods and services, thereby reducing price growth.
So far, the results of doing this have been mixed. After a period of rapid interest rate hikes, the pace of inflation fell from more than 9% in the summer of 2022 to its current levels of between 3% and 4%.
But the decline has since stalled.
There are complex reasons for the lack of progress and many elements may actually be out of the Federal Reserve's control. Home and auto insurance companies continue to pass on higher costs to consumers. Meanwhile, even as many consumers struggle, post-pandemic wealth gains have left others — especially older consumers — with plenty of money to spend, despite higher prices.
Whatever the case, the wait for slower inflation has left the average consumer in an increasingly dour mood. On Tuesday, the Conference Board’s monthly Consumer Confidence Index came in at its lowest level since July 2022. Consumers expressed more concern about the current labor market situation, future business conditions, job availability and income, the group said.
Still, most analysts say the odds of a recession are remote. In the most recent GDP report, spending on services, which includes everything from restaurants to airfare to professional services, came in at 4% year-on-year, the fastest rate since 2021.
“Don’t underestimate this economy,” economists with Wells Fargo said in a report following the release.
Consumers thus appear to be sensing that the most crucial part of the economy — the jobs market — is slowing, even while prices remain elevated.
Fed Chair Jerome Powell acknowledged this complex economic environment in remarks in early March.
"The outlook is still quite uncertain," Powell said. The central bank must balance its campaign against elevated inflation with ensuring the economy does not slip into a recession.
Economists like Zandi aren't expecting the Fed to raise interest rates, either.
Instead, the Fed will likely continue to keep rates elevated — perhaps even until after the November general election so that it does not appear to favor one candidate or another.
"[Powell's] message is clear: We can’t cut rates and we’re not there yet," Zandi said. "We've still got a ways to go."
Rob Wile
Rob Wile is a breaking business news reporter for NBC News Digital.
FAQs
U.S. Federal Reserve keeps interest rates at current levels as inflation holds its grip. On May 1, 2024, the Federal Reserve opted to maintain the federal funds rate at its current level, 5.25% – 5.50%.
How does the Federal Reserve use interest rates to influence inflation? ›
When the central bank increases interest rates, borrowing becomes more expensive. In this environment, both consumers and businesses might think twice about taking out loans for major purchases or investments. This slows down spending, typically lowering overall demand and hopefully reducing inflation.
What does the Federal Reserve do in order to keep inflation in check? ›
The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.
Why does the Federal Reserve aim to maintain the same inflation rate? ›
Inflation rates around these levels are often associated with good economic performance: a higher inflation rate could prevent the public from making accurate longer-term economic and financial decisions and may entail a variety of costs as described above, while a lower rate might make it harder to prevent the economy ...
What is the Fed doing with interest rates? ›
At its March 2024 gathering the Fed decided to keep the federal funds target rate at 5.25% to 5.5%, where it has remained since July 2023. To combat ongoing inflation, the rate was raised 11 times between March 2022 and July 2023.
Why does the Fed keep raising interest rates? ›
The Fed has repeatedly raised rates in an effort to corral rampant inflation that has reached 40-year highs. Higher interest rates may help curb soaring prices, but they also increase the cost of borrowing for mortgages, personal loans and credit cards.
Is there a relationship between interest rates and inflation? ›
Inflation and interest rates tend to move in the same direction, with one often chasing the other as they rise and fall.
How does the Federal Reserve track inflation? ›
A price index measures changes in the price of a group of goods and services. The Fed considers several price indexes because different indexes track different products and services, and because indexes are calculated differently. Therefore, various indexes can send diverse signals about inflation.
What happens if the Federal Reserve decides to stabilize the inflation rate? ›
If the Federal Reserve decides to stabilize the economy, it will reduce its nominal interest rate target which will lower the real interest rate at every inflation rate. The lower real interest rate will increase investment and output and restore the economy to its long-run equilibrium.
What is the root cause of inflation? ›
An increase in the price of domestic or imported inputs (such as oil or raw materials) pushes up production costs. As firms are faced with higher costs of producing each unit of output they tend to produce a lower level of output and raise the prices of their goods and services.
How does increasing interest rates reduce inflation? Increasing the bank rate is like a lever for slowing down inflation. By raising it, people should, in theory, start to save more and borrow less, which will push down demand for goods and services and lead to lower prices.
What is a healthy inflation rate? ›
The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve's mandate for maximum employment and price stability.
Who benefits from inflation? ›
Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.
Does the Fed really control interest rates? ›
But each time you hear about the Fed's interest rate decisions, it's not as if the Fed goes to every lender or financial firm throughout the economy and dictates a specific interest rate. Instead, the Fed has control over multiple borrowing benchmarks that influence what consumers pay.
What will interest rates look like in 5 years? ›
ING's interest rate predictions indicate 2024 rates starting at 4%, with subsequent cuts to 3.75% in the second quarter. Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%.
Will mortgage rates ever be 3% again? ›
In summary, it is unlikely that mortgage rates in the US will ever reach 3% again, at least not in the foreseeable future.
What does the Federal Reserve use to measure inflation? ›
In particular, the Fed relies on the Core PCE index.
Can the Federal Reserve cause inflation? ›
Monetary policy is a major cause of the increase in inflation, says Stanford economist John Taylor. Inflation rises when the Federal Reserve sets too low of an interest rate or when the growth of money supply increases too rapidly – as we are seeing now, says Stanford economist John Taylor.
What inflation rate does the Federal Reserve aim for over time? ›
By 2019, the Fed tweaked the goal and stated that it would aim for inflation that averages 2% over time, allowing the measure to hover somewhat above the target for a while to make up for periods when it fell short.
