The Federal Reserve held its most recent meeting on May 1st. The Fed decided to keep the interest rates steady at a range of 5.25% to 5.5%, which keeps them at a 23-year high. Federal Reserve Chair Jerome Powell ruled out the possibility that the next policy rate move at its June meeting will be an interest rate hike.

The decision was the latest blow for income investors (and homebuyers) who have been battered by the rise in interest rates and are eagerly awaiting their decline. Last December, economists predicted that interest rate cuts would start in March. Later that was pushed to June, and now June looks like it is out of the question.

What exactly is the reason for the delay?

Inflation Remains Above Target

The central bank emphasized that inflation has remained stubbornly high and said it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target.

The Fed’s dual mandate is price stability and maximum employment. Both aspects of this mandate currently suggest rate cuts would be premature. Inflation remains above the Fed’s target, and broader measures of unemployment have yet to show significant increases.

The U.S. unemployment rate has remained below 4% for over two years, marking an unprecedented streak not seen in decades.

Despite expectations from many economists that the jobless rate would surpass 4% by now due to the series of interest rate hikes aimed at slowing down the economy to combat inflation, the streak of sub-4% unemployment may soon end.

According to the latest jobs report, the unemployment rate stands at 3.8%. A significant deterioration in the labor market would be necessary to draw the attention of central bankers and potentially prompt them to contemplate earlier rate cuts.

Inflation is significantly down from the 2022 peak, but the two most recent readings of the Consumer Price Index (CPI) showed inflation ticking back up. That, more than anything, has given the Fed pause in cutting rates.

Stagflation not a Concern

Powell emphasized that the decision to slow the pace of reducing its balance sheet is not intended to provide accommodation to the economy. He also downplayed concerns about the U.S. entering a period of “stagflation”.

Stagflation occurs when an economy faces stagnant growth, high unemployment, and high inflation all at once. Policymakers find it difficult to address because actions to boost growth, like cutting interest rates, could worsen inflation. Conversely, steps to reduce inflation, like raising interest rates, might worsen unemployment. Stagflation poses challenges for policymakers, presenting them with conflicting choices that can prolong economic difficulties.

Following the Fed’s decision, the major averages leapt sharply higher in afternoon trading.

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