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The Federal Reserve kept interest rates unchanged on Wednesday, holding the fed funds rate at a 23-year high between 5.25%-5.50% amid a "lack of further progress" bringing inflation back to its 2% target.
And while introducing a tougher assessment on inflation, Fed Chair Jerome Powell left little doubt during a press conference about the Fed's most likely next move.
"It is unlikely the next policy move will be a hike," Powell said during a press conference.
In response, stocks initially rallied and yields fell as Powell took the market's biggest fear largely off the table. Stocks wrapped up the day largely where they stood before the Fed meeting as investors realized they already knew what Powell was telling them: Rate hikes are not being seriously considered by the Fed.
Elsewhere in his press conference, Powell outlined a variety of potential scenarios that could warrant rate cuts, including inflation moving more convincingly toward its 2% target and an unexpected weakening in the labor market. Powell's discussion about what might prompt a rate hike was less robust.
Pressed by Yahoo Finance's Jennifer Schonberger on whether, say, a rise in the unemployment rate above 4% would constitute an unexpected softening, Powell said a "couple of tenths [of a percentage point] in the unemployment rate would probably not do that."
As of March, the unemployment rate stood at 3.8%. Economists expect the unemployment rate in April will be unchanged.
Count this, then, as another signal the bar is high for the Fed to rethink its contention that interest rates have reached their peak for this economic cycle. A standard that is clearly far more stringent than a few months of inflation data that, in Powell's own words, have been "higher than expected" so far this year.
Coming into Wednesday's meeting, investor expectations on how many times the Fed would cut rates in 2024 have been steadily pared back.
As Yahoo Finance's Josh Schafer noted Wednesday, when the year began, nearly seven 0.25% rate cuts were being priced in; as of Wednesday, this had been reduced to just one.
As Renaissance Macro's Neil Dutta wrote: "Powell believes that policy is restrictive. If policy is restrictive, they are more concerned about downside growth risks than upside inflation risks."
Elevated interest rates create challenges for borrowers and, like inflation, weigh more heavily on those households with fewer financial resources. But for investors, the question has long ceased to be about the level of rates but the direction of future changes.
Rates are high today. But confidence that rates will be lower in the future underwrites much of the optimism, for instance, that Big Tech's AI spending will bolster their future bottom lines.
Powell's prepared remarks on Wednesday no longer included language suggesting it would be appropriate "at some point" this year to cut rates. A notable in the close-reading world of Fedspeak.
And the bias to cut rates from Powell and the Fed remains clear.
As Wells Fargo economist Jay Bryson wrote Wednesday, "recent data appear to have pushed the FOMC away from the precipice of rate cuts but still very comfortable with a wait and see approach."
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