Fed Keeps Interest Rates Steady, Announces Slower-Than-Expected Pace Of Balance Sheet Runoff

BY Benzinga | ECONOMIC | 05/01/24 02:21 PM EDT

The Federal Reserve opted to keep the federal funds rate unchanged at 5.25% to 5.5% Wednesday, as widely expected, reinforcing its commitment to steering the economy toward sustainable growth and controlling inflation.

Regarding the latest inflation dynamics, the Fed stated that "In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective."

Furthermore, it noted that “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

The Fed said it does not expect it will be appropriate to cut rates until it has gained greater confidence inflation is moving sustainably toward 2%.

The Federal Open Market Committee has outlined a plan to gradually reduce its holdings of Treasury securities and agency debt, marking a shift toward normalizing its balance sheet.

Starting in June, the Fed will reduce the monthly redemption cap on Treasury securities from $60 billion to $25 billion while maintaining the cap on agency debt and mortgage-backed securities at $35 billion.

This represents a slower-than-expected pace of reduction in so-called quantitative tightening, as markets participants expected the Fed to shift from $60 billion to $30 billion in its monthly redemption cap on Treasury securities.

Wednesday’s Fed statement indicates that risks to achieving employment and inflation goals ‘have moved toward a better balance over the last year,’ as opposed to the phrasing “are moving into better balance” in the March policy statement.

Market The U.S. dollar index (DXY), as tracked by the Invesco DB USD Index Bullish Fund ETF , inched lower minutes after the statement release. Treasury yields inched lower across the board.

Stocks positively reacted, with the SPDR S&P 500 ETF Trust (SPY) shifting from earlier losses to gains, up 0.2% for the day.

Traders now await Fed Chair Jerome Powell‘s remarks due at 2:30 p.m. ET.

Read now: April Jobs Report Preview: Bank Of America Anticipates Solid Payrolls Growth, Rising Wage Pressures

Federal Reserve illustration created using artificial intelligence via MidJourney.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article