The US Federal Reserve on Wednesday, 29 April, avoided surprising markets by keeping the federal funds rate unchanged for the third consecutive meeting at 3.5%–3.75% amdi increased risk of inflation rising due to higher global energy prices.
The Fed’s decision to hold rates steady is on expected lines, as the risk of an inflation flare-up remains high due to energy prices remaining elevated for a longer period. Brent Crude prices are above the $110 per barrel as the Strait of Hormuz remains effectively closed amid stalled US-Iran talks.
The US Federal Open Market Committee (FOMC) met on April 28-29 to decide the policy rates amid high uncertainty stemming from the West Asian war. This was the last policy meeting of Jerome Powell as the Fed chief, as his term expires on May 15.
“This is my last press conference as chair, ” said Powell as he congratulated Kevin Warsh on his role as new Fed chief.
U.S. President Donald Trump has picked Kevin Warsh to lead the Federal Reserve after Powell. Meanwhile, as per news agency Reuters, the Senate Banking Committee voted along party lines to advance Warsh’s nomination to the full Republican-controlled Senate, clearing a key procedural hurdle for him to succeed Powell.
US Fed April policy meeting: Key takeaways
1. Rates remain unchanged; the number of dissenters rises
The FOMC voted 8-4 to hold the benchmark interest rate in a range of 3.5% to 3.75%, highlighting increased uncertainty due to the war in West Asia (the Middle East). The four dissenting votes were a first since 1992.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4%,” Read FOMC statement.
Among the four who opposed the decision, Stephen I. Miran called for lowering the target range for the federal funds rate by 25 basis points, while three policymakers supported the pause but showed no inclination to lower interest rates.
2. Inflation risk remains elevated
The FOMC highlighted the increased risk of inflation from recent increases in global energy prices.
“Inflation is elevated, in part reflecting the recent increase in global energy prices,” the FOMC statement read.
In his press conference, Powell hinted that the impact of higher energy prices on the inflation trajectory could not be assessed at this juncture.
“We need to wait and see. We are in a good place to wait and let things develop,” Powell said.
US inflation remained above the Fed’s 2% target even before the US-Iran conflict started. The conflict has added another layer of uncertainty, making the situation complex for the Federal Reserve to fulfil its dual mandate of keeping inflation near its long-term 2% target while ensuring maximum employment.
3. Economy in good shape
As per the FOMC statement, economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months.
4. Incoming data to dictate the policy
The FOMC said it will continue to monitor the incoming information for the economic outlook and would adjust the monetary policy stance if risks emerge that could impede the attainment of the committee’s goals.
“The Committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments,” the FOMC statement read.
5. Powell intends to stay on the Fed board
While Powell said it was his last meeting as the chairman, he also expressed his intention to remain at the central bank as governor even after his term as chairman ends. He said he “will continue to serve as a governor for a period of time to be determined.”
Powell said he will not leave the Fed board until the investigation is completely over with transparency.
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