The Fed maintains its rates in the face of “lack of progress” on the inflation front

The American Federal Reserve (Fed) kept its interest rates unchanged on Wednesday after its last meeting, citing the recent “lack of progress” on the inflation front, but announced that it will deflate the volume of assets on its balance sheet less quickly from June.

The American central bank has left its rates at the highest in more than twenty years, between 5.25 and 5.50%, a range within which they have been moving since July, it announced in a press release published in resulting from its meeting. This has the effect of keeping interest rates on home loans, credit cards, car loans, etc. high, to prevent prices from continuing to soar.

The Monetary Policy Committee (FOMC) states that "in recent months, there has been a lack of further progress toward the Committee's goal of 2% inflation." Inflation seemed on track to gradually reach its 2% target. But since January, it has started to rise again, to 2.7% over one year in March, according to the PCE index favored by the Fed - the one it wants to reduce to 2% -, and to 3.5% according to the CPI index.

The Fed maintains “its position, as if doing a yoga pose. They must maintain rates, at least at the current level", otherwise they face "a resumption of inflation", commented Wednesday during a conference call (before the decision) Nela Richardson, chief economist of ADP , which publishes a monthly survey on private employment.

The Chairman of the American Federal Reserve, Jerome Powell, warned on Wednesday that it would undoubtedly take “more time than expected” before having confidence in the fall in inflation, implying that rates would remain high for longer. During a press conference, however, he noted that it was “unlikely that the next movement on rates would be an increase”, monetary policy being considered “sufficiently restrictive” over time. With these announcements, the New York Stock Exchange, which was stagnating on Wednesday, suddenly climbed before closing divided. The Dow Jones index gained 0.23%, the Nasdaq, with its strong technological coloring, lost 0.33% and the broader S index

The markets, which were full of hope of seeing rates start to fall in June, are now betting instead on September, or even November, according to the CME Group estimate. “The Fed will need several months of good news on wage growth and inflation,” notes Nancy Vanden Houten, economist for Oxford Economics.

The Federal Reserve, however, is marking the beginning of an easing of monetary policy: it announced on Wednesday that it will reduce the volume of assets on its balance sheet more slowly from June.

The Fed's portfolio had grown during the pandemic, when it massively purchased securities, flooding the market with liquidity to keep the financial system functioning. Then, alongside rate increases intended to fight inflation, it sold securities, reducing its portfolio by 1,500 billion dollars.

The rebound in inflation in the United States contrasts with Europe, where the sharp slowdown in inflation is leading the European Central Bank (ECB) to consider a rate cut as early as June.

The American job market also remains too tight for the Fed's liking. The official figures for April will be published on Friday, but companies in the private sector alone created 192,000 jobs in April, according to the monthly ADP/Stanford Lab survey published on Wednesday. To drive the point home, the employment cost index was much higher than expected in the first quarter, “suggesting that the deceleration of wages has stopped, at least temporarily,” notes Krishna Guha, economist. for Evercore, an investment advisory company.