By Takuya Karube,
The U.S. Federal Reserve on Wednesday held its benchmark interest rate steady at a 23-year high of 5.25-5.50 percent due to recent stubborn inflation, hinting that borrowing costs will remain at about the same level for a longer period.
The rate-setting Federal Open Market Committee said in a unanimously approved statement following a two-day policy meeting, "In recent months, there has been a lack of further progress" on containing price increases.
The committee reiterated it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
"Readings on inflation have come in above expectations," Fed Chair Jerome Powell told a press conference. "It is likely that gaining such greater confidence will take longer than previously expected."
With attention focused on how Powell would characterize the rate outlook, he added, "I don't know how long it will take...I can just say that when we get that confidence, then rate cuts will be in scope."
At the same time, Powell said, "I think it's unlikely that the next policy rate move will be a hike," noting that the Fed's focus has been to maintain its current restrictive stance.
The Fed's sixth consecutive decision to stick with the same target range for the federal funds rate, which commercial banks charge each other for overnight loans, was announced as economists and market players are increasingly uncertain about the timing and number of possible rate cuts by the central bank this year.
The prospect that the Fed would have to delay rate cuts from its initial scenario has underpinned the U.S. dollar's continued strength against other currencies, especially the Japanese yen.
The wide interest rate differential between the United States and Japan is the major driver of the yen's depreciation, with the Japanese currency briefly tumbling to a new 34-year low in the 160 range against the dollar earlier this week.
However, the yen surged against the dollar after the FOMC meeting, briefly hitting 153, compared with hovering in the upper 157 range before the outcome was announced. A banker in New York said Japanese monetary authorities are believed to have intervened in the market to prop up the value of the yen.
Fed policymakers suggested at their previous meeting in March that the central bank could carry out three quarter-point rate cuts from current levels.
But recent data showed that inflation is stickier than previously expected, with the consumer price index up 3.5 percent in March from a year earlier, rising from 3.2 percent in the previous month. Excluding food and fuel prices, core inflation was higher at 3.8 percent on an annualized basis.
Ahead of the meeting, most market strategists were thinking one or two rate cuts would still be possible by the end of this year.
In addition to the condition that inflation is moving sustainably down to 2 percent, Powell told the press conference that rate cuts could begin if the job market weakens unexpectedly.
On Wednesday, the Fed also said it will slow the pace of quantitative tightening, under which it is reducing the massive amount of bonds on its balance sheet that were purchased during the COVID-19 pandemic to pump money into the economy.
Under the new scheme, starting in June, it will lower the cap on the amount of U.S Treasury bonds it allows to mature without buying them back each month to $25 billion from the current $60 billion.
Slowing down the process of reducing the amount of money in the banking system could help lower yields.
The Fed said mortgage-backed securities will continue to roll off the balance sheet every month by up to $35 billion.
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BOJ downplays weak yen impact, but keeps door open for rate hikes
