Fed meeting: What to know as US central bank signals higher-for-longer stance

Jerome Powell to be grilled on timing of interest rate cuts and Federal Reserve's independence

Recent data has 'clearly not given us greater confidence', Federal Reserve chairman Jerome Powell said in April. Bloomberg

The Federal Reserve is poised to show it is willing to keep US interest rates elevated for longer, after recent economic data showed its progress in taming inflation has stalled.

On Wednesday, the Fed will conclude its two-day meeting, during which it is almost guaranteed to keep its target range steady between 5.25 per cent and 5.5 per cent.

The US central bank earlier this year pivoted its messaging to indicate it could begin cutting rates at some point this year. But with inflation proving sticky, officials have begun changing course, implying they intend to keep rates elevated for longer.

The policy decision will be announced at 2pm Eastern Time – which is 10pm in the UAE. The Central Bank of the UAE, which follows the Fed's decisions, will make its announcement shortly after. Fed chairman Jerome Powell is set to address reporters at 2.30pm.

Here's what to know as the Fed wraps up its latest two-day meeting:

Questions on delayed rate cuts

With the Fed almost guaranteed to keep its target range steady, the financial world will be mostly tuning in to assess Mr Powell's perception of the near-term economic outlook.

Wednesday's meetings come after economic data showed stickier-than-expected inflation, a strong labour market and still-strong consumer spending.

“The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence,” Mr Powell said at the Wilson Centre think tank in Washington last month.

The core Price Consumption Expenditures (PCE) Price Index showed inflation rose 2.8 per cent last month, unchanged from where it stood in February. Meanwhile, consumer spending rose 0.8 per cent for the second straight month.

“That suggests easing isn't around the corner, and it puts more emphasis on how inflation evolves into Q2 to determine the eventual start of Fed easing,” Wells Fargo economists Tim Quinlan, Shannon Seery Grein and Jeremiah Kohl wrote in a note to investors.

Markets have taken a cue from Mr Powell's signalling by pencilling in only one rate cut towards the end of the year, CME data showed, a far cry from the four they had projected at one point.

Fed independence under pressure?

A recent report from The Wall Street Journal has put the Fed's independence under the spotlight. The Journal reported that, should former president Donald Trump win the presidency this year, he plans alterations to the Fed that would align it more with his interests.

Two possible moves include sacking Mr Powell and having Mr Trump serve as de facto chairman, the Journal reported. The idea would face significant legal hurdles and has never been tested in court.

Mr Trump's campaign told the Journal no announcements should be considered official unless a message comes directly from the former president or his team.

The Fed's monetary policy decisions will carry greater weight as the presidential election comes closer. Traders do not expect the Fed will be ready to cut rates until September, two months before Election Day.

Mr Powell, who faced pressure from Mr Trump during his term in office, has been a consistent defender of the Fed's independence.

“Such independence for a federal agency is and should be rare,” he said at the Stanford Graduate School of Business on April 3. “In the case of the Fed, independence is essential to our ability to serve the public.”

Balance sheet run-off

Also in focus this week will be if the Fed has any announcements to make on its balance sheet.

Mr Powell said during his March news conference that it would soon be appropriate to begin slowing the run-off pace.

In its March statement, the Federal Open Market committee said it would continue to reduce its holdings of Treasury securities and mortgage-backed securities (MBS). This process, known as quantitative tightening or “QT”, is one of the other tools the Fed uses to heat up or cool down the economy.

“The Fed wants to start this process sooner rather than later, reducing the odds of a repeat of the September 2019 repo market crisis, when overnight rates spiked, surprising the Fed, which believed that there were ample reserves in the system until the market proved otherwise,” wrote Ryan Sweet, chief economist at Oxford Economics.

The Fed's security holdings have declined by about $1.5 trillion to its current $7.5 trillion level.