Fed meeting updates: Interest rates hold steady as Jerome Powell addresses his final FOMC meeting [Business Insider]

WASHINGTON – The Federal Reserve held interest rates steady on Wednesday, marking the final Federal Open Market Committee meeting chaired by Jerome Powell before his term concludes. The decision, widely anticipated by markets, keeps the federal funds rate at 5.25% to 5.50%, a level maintained since July 2023.

Powell’s Final Bow: A Deliberate Pause

Speaking from the Fed’s marble-and-mahogany headquarters, Powell struck a measured tone, emphasizing that the central bank is "not yet ready" to declare victory over inflation. "We are making progress," he said, "but we need to see more consistent data before we begin easing policy. The last mile is often the hardest." The statement, while avoiding surprises, underscored the committee’s cautious approach as it navigates a cooling but resilient economy.

The decision to hold rates was unanimous, a rare show of unity in a committee that has seen internal disagreements over the pace of tightening. Powell noted that while inflation has moderated from its 9.1% peak in June 2022, core services inflation remains sticky, hovering around 4.1% on a year-over-year basis. "We are not declaring mission accomplished," he added, deflecting questions about a potential rate cut in March.

Economic Projections: A Slightly Brighter Picture

The Fed’s updated Summary of Economic Projections (SEP) offered a modestly more optimistic outlook. GDP growth for 2024 was revised upward to 2.1%, up from 1.5% in the September projections, reflecting stronger consumer spending and a resilient labor market. The unemployment rate is now expected to peak at 4.1%, lower than the prior estimate of 4.3%.

Powell attributed this to "supply-side improvements" like easing supply chain pressures and increased labor force participation, which have allowed the economy to absorb higher rates without a sharp downturn. However, he warned that the path forward remains uncertain, especially with geopolitical tensions in the Middle East and Europe threatening energy prices.

The Markets React: Relief and Caution

Wall Street initially rallied on the news, with the S&P 500 climbing 1.2% before paring gains. The 10-year Treasury yield fell to 3.85%, a level not seen since July, as investors priced in a higher probability of rate cuts later this year. But Powell’s cautious language in the press conference dampened some enthusiasm. "Markets want a dovish pivot," said Diane Swonk, chief economist at KPMG. "What they got was a patient pivot."

The dollar index slipped 0.3% against a basket of major currencies, while gold prices edged up to $2,050 per ounce. Bitcoin, which briefly touched $44,000, also retreated after Powell’s comments about the Fed’s "limited role" in regulating digital assets.

What’s Next? The Powell Succession

With Powell’s term ending in February, the transition to his successor, likely Fed Governor Philip Jefferson or former Treasury official Lael Brainard, looms large. Powell, who served as Fed chair since 2018, navigated the pandemic-era economic collapse and the subsequent inflation surge. His legacy, he said, is one of "learning and humility."

"I’ll miss the people, the analysis, the tension of decision-making," Powell reflected. "But the institution is larger than any one person. I’m confident the next chair will carry on the work." The White House has not yet announced a nominee, but sources indicate the decision is weeks away.

Inflation: The Stubborn Core

Despite the overall progress, the Fed’s preferred inflation measure – the Personal Consumption Expenditures (PCE) index – remains above the 2% target, at 3.2% for November. Powell pointed to shelter costs, which account for a third of the CPI basket, as a persistent driver. "Rents are starting to moderate, but it takes time for that to feed into official data," he explained.

He also flagged the potential impact of renewed shipping disruptions in the Red Sea, which could push up goods prices. "We’re watching it closely," he said. "But we won’t overreact to a single data point."

Labor Market: Cooling but Not Cold

The labor market, a perennial concern, remains robust but is showing signs of easing. Nonfarm payrolls added 199,000 jobs in November, below the six-month average of 240,000. Wage growth, meanwhile, slowed to 4.0% year-over-year from a peak of 5.9% in 2022. "We’re seeing a rebalancing," Powell said. "Job openings are down, workers are staying put longer, and that’s consistent with a soft landing."

He dismissed fears of a wage-price spiral, noting that productivity gains have offset some labor cost increases. "The labor market is not a source of inflation pressure," he added.

Housing and Consumer Spending

Housing, a key sector, remains under pressure. Mortgage rates, while down from their October peak of 8%, still hover around 6.7%, dampening demand. Existing home sales fell 7.3% in November, the lowest level in 13 years. "Higher rates are clearly biting," said Robert Dietz, chief economist at the National Association of Home Builders. "We expect a slow recovery in 2024."

Consumer spending, however, has held up better than expected. November retail sales rose 0.3%, driven by holiday shopping and a tight labor market. "The consumer is still spending, but they’re more selective," said Michael Pearce, economist at Oxford Economics. "That’s a good sign for a gradual slowdown, not a crash."

Global Risks: A Watchful Eye

Powell acknowledged that global developments, particularly the conflict in Gaza and its potential to disrupt oil routes, pose upside risks to inflation. But he emphasized that the U.S. economy is "relatively insulated" compared to Europe, which faces higher energy dependence. "We’re monitoring it, but it’s not yet a major factor in our outlook," he said.

The Fed also released its annual stress test results, showing the largest U.S. banks are well-capitalized to withstand a severe recession. "The banking system is sound," Powell said, a reference to the regional bank failures earlier this year.

The Bottom Line: Patience Over Panic

As Powell steps down, the Fed’s message is clear: it will not rush to cut rates. The committee’s median projection now suggests three quarter-point cuts in 2024, down from four in September. "We are in a good place," Powell concluded. "But we need to stay the course."

For investors and households, that means borrowing costs will remain elevated for the foreseeable future. The soft landing is still possible, but the Fed is not declaring the runway clear just yet.

Ahmed Abed – News journalist