The Federal Reserve held interest rates steady for a fourth straight meeting and signalled an openness to cutting them, though Fed Chair Jerome Powell threw cold water on investors’ hopes that reductions would begin in March. 

The central bank’s policy-making Federal Open Market Committee showed it is in no rush to reduce rates, noting in a statement Wednesday that 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%.”

Powell reinforced this message by saying, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting.” 

While Powell acknowledged the dramatic inflation progress seen in recent months, he repeatedly emphasized the need to see “more” data confirming that downward trend. Powell spoke just after the Fed issued a statement following their two-day meeting, where officials dropped their previous assertion that a rate hike was possible and instead adopted a more even-handed assessment of the future policy path.

“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said. “We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”

The decision to leave the target range for the benchmark federal funds rate unchanged at a 22-year-high of 5.25% to 5.5% was unanimous. The central bank also reiterated its intention to continue reducing its balance sheet by as much as $95 billion per month.

Powell told reporters Fed officials plan to start in-depth talks about the balance sheet at their March meeting. 

US Treasury yields pared declines, while the S&P 500 index remained lower. Investors also reduced the probability of a March rate cut.

Greater Balance

Fed officials said the risks to achieving their employment and inflation goals are “moving into better balance.” 

“In considering any adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement said.

In their post-meeting statement, policymakers tweaked their description of economic activity. Following stronger-than-expected economic growth in the fourth quarter, the committee described activity as “expanding at a solid pace.”

Among other changes to the statement, the committee omitted language that had been included in some form since last March, calling the banking system “sound and resilient” and warning that tighter credit conditions were likely to weigh on the economy. 

As usual at the start of the year, the January meeting brought a rotation of new voters to the FOMC, including the presidents of the Fed’s regional banks in Atlanta, Cleveland, Richmond and San Francisco.

The FOMC also used its first meeting of the year to reaffirm its long-term goals and monetary policy strategy, including its commitment to a 2% average inflation target.

The committee also updated its policies governing investments and trading by Fed staff and policymakers. It expanded the number of Fed staff who are subject to the most stringent restrictions and tightened restrictions on all staff with access to confidential FOMC information.

Strong Performance

Across the board, the economy performed better than policymakers expected last year.

Inflation fell more steeply, with the Fed’s favored measure ending the year at 2.6%. The economy expanded more quickly, with gross domestic product climbing 2.5%. And the jobs market was stronger, with the unemployment rate in December clocking in at 3.7%, generally in line with where it was when Fed officials began raising rates in March 2022.

The Bureau of Labor Statistics will release data Friday on the job market in January, the first key reading on how the economy is performing so far in 2024. Economists are anticipating a generally solid report, with payroll growth slowing a bit and unemployment ticking up just slightly.

In the run-up to Wednesday’s meeting, policymakers suggested they’re willing to begin contemplating rate cuts while pushing back against investors’ hopes for imminent and deep reductions.

“With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” Fed Governor Christopher Waller said at a Brookings Institution event on Jan. 16.

In December, policymakers projected a cumulative 75 basis points of cuts this year, according to their median forecast. They’ll next update those forecasts in March.

The Fed is trying to accomplish something it’s arguably only pulled off once in its more than its 100-year history: corral inflation through tighter credit without crashing the US into a recession.

What’s more, it’s trying to complete that task during a presidential election year and in a country that’s deeply divided politically.

Several Democratic Party lawmakers - including Senate Banking Committee Chair Sherrod Brown, and Massachusetts Senator and former presidential candidate Elizabeth Warren - wrote to Powell this week urging him to lower interest rates.

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