US Fed keeps rates steady, says ways to go for soft landing: 7 key takeaways

It added that unless there are clear indication that inflation is moving sustainably toward 2 percent, it will not be “appropriate to reduce the target range.”

Treading on expected lines, the Federal Open Market Committee (FOMC) of the US Federal Reserve Committee decided to maintain the target range for the federal funds rate at 5.25 to 5.5 percent. This is the  fourth straight meeting when the Fed has kept rates unchanged.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,” the Fed said in its statement.

The Fed believes that the inflation has come down from its highs but “remains elevated”. It added that unless there are clear indication that inflation is moving sustainably toward 2 percent, it will not be “appropriate to reduce the target range.”

Below are some of the key takeaways: 

Waiting for "good" data

Fed chair Jerome Powell in his press conference said that the Fed is gaining confidence as far as inflation is concerned but committee members want to be more confident about the data.

"We have seen good six month of data on inflation, but we want continuation of more good data," said Powell. "The Committee is strongly committed to returning inflation to its 2 percent objective."

Not worried over strong labour market

Contrary to popular belief that Fed wants the US labour market to weaken before it takes a decision to cut rates, Powell said he is okay with strong labour market.

Strong labour market - where demand for labour is higher than supply - usually leads to higher wage growth, which in turn increased spending power. This keeps inflation higher.

Powed did say that labour market was now normalising and close to reaching a "normal" level.

Strong US economy 

FOMC said recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low.

No rate cut in March

It was unlikely that there would be a rate cut in march from its 22-year high levels, Powell said. However, the Fed chair expressed that everyone in the committee was in favour of cutting rates some time this year.

He refrained from giving exact timeline or scenario when the rate cut would begin, but added that it will depend on how the economy evolves in coming months.

Soft landing?

Powell said that the much touted soft landing was still far away.  This refers to a scenario in which inflation falls back to 2 percent and the economy cools without dipping into recession.

"We have not achieved soft landing. We have ways to go. We are not claiming victory as of yet," Powell said.

Balance sheet

The central bank also reiterated its intention to continue reducing its balance sheet by as much as $95 billion per month. "The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans," said the Committee.

When asked if there are any deliberation on decreasing the pace of winding down the balance sheet, Powell said the committee will delve into a deeper discussion over this in the March meeting.

Market reaction

The three major US stock indices - Nasdaq, S&P 500 and Dow Jones Industrial Average - were already weighed down by weakness in tech and tech-adjacent megacap stocks the day after disappointing Alphabet results. However, they pared losses after Powell said the FOMC was confident it will be appropriate to reduce rates once it has confirmation inflation is coming down sustainably.

The Dow Jones Industrial Average rose 26.59 points, or 0.06 percent, to 38,492.27, the S&P 500 lost 31.38 points, or 0.64 percent, to 4,893.59 and the Nasdaq Composite lost 167.75 points, or 1.10 percent, to 15,342.15.

US Treasury yields pared declines and the dollar index reversed losses on the day. GIFT Nifty traded flat at 21,822 level.