US: Fed Holds Rates Steady, Signals Future Cuts

The US Federal Reserve has decided to hold its key interest rate steady for the sixth consecutive meeting, maintaining the target range between 5.25 and 5.50 percent. Recent disappointing inflation figures have led the central bank to assess that restoring confidence in a disinflationary trend will take longer than previously anticipated.

In its post-meeting statement, the Federal Open Market Committee (FOMC) downplayed the immediate prospect of rate cuts. Federal Reserve Chair Jerome Powell stated at the subsequent press conference that rate increases remain unlikely. However, he outlined two scenarios that could support rate cuts: either improved inflation data or a significant weakening in the labor market. Powell expressed mild concern over recent inflation numbers but indicated that a continued disinflationary trend is likely.

Analysts believe the Fed remains on a path toward rate cuts later this year, though the exact timing will depend on incoming economic data. If inflation remains elevated and the labor market stays robust, rates are expected to stay put. However, a more probable scenario involves inflation moderating and the labor market cooling, potentially allowing for at least two 25-basis-point rate cuts before year-end.

Separately, the Fed announced it will slow the pace of its balance sheet reduction starting in June. The monthly cap for reinvestments in US Treasury securities will be lowered from $60 billion to $25 billion. The cap for mortgage-backed securities (MBS) will remain at $35 billion per month. This adjustment is expected to roughly halve the monthly balance sheet runoff and is described by the Fed not as monetary easing, but as a measure to prevent market disruptions.