Fed Holds Rates Steady Amid Stagflation Concerns, Sparking Market Sell-Off

On May 1, 2024, the Federal Reserve announced its decision to maintain the overnight federal funds rate at the current range of 5.25% to 5.5%, marking the sixth consecutive meeting at which policymakers have opted to hold rates steady. This decision keeps the federal funds rate at the highest target range in over 23 years.

Why this matters: The Fed's decision to hold rates steady amid stagflation concerns has significant implications for the overall health of the US economy, as it may lead to a prolonged period of slow growth and high inflation. This, in turn, could have far-reaching consequences for businesses, consumers, and investors, affecting everything from job security to retirement savings.

Federal Reserve Chair Jerome Powell acknowledged that the hot first-quarter inflation data means it will likely take longer than anticipated for the Fed to gain confidence that the economy is on a sustainable path toward 2% inflation. Powell reiterated his view that the Fed's current stance is appropriately restrictive, stating, "We don't expect the Fed to start cutting rates until later this year, given stable economic growth and sticky inflation, and we'd need to see a meaningful reversal in growth to spur the Fed toward rate hikes."

The Fed also confirmed that starting in June, it would slow the rate at which it reduces the size of its balance sheet, lowering the Treasury securities monthly redemption cap from $60 billion to $25 billion. The agency debt and agency mortgage-backed securities monthly redemption cap will be maintained at $35 billion. This reduction in the balance sheet runoff is seen as a first step toward a more accommodating monetary policy.

The Fed remains committed to its dual goals of bringing inflation down to its 2% target and achieving maximum employment. Economic growth and inflation are too high for the Fed to consider cutting rates at this time. Chair Powell emphasized that the path forward is uncertain and that all decisions will depend on upcoming data and be made on a meeting-to-meeting basis.

Key Takeaways

• Fed maintains federal funds rate at 5.25%-5.5%, highest in 23 years.
• Decision may lead to prolonged slow growth and high inflation (stagflation).
• Fed Chair Powell expects no rate cuts until later this year.
• Market reaction: 1.5% sell-off, with mixed performance across indices.
• Fed to slow balance sheet reduction in June, a step towards more accommodative policy.