Monetary policy: US Federal Reserve keeps interest rates unchanged but Jerome Powell says inflation still too high

| The Federal Reserve signalled that US interest rates are likely to stay higher for longer because of sticky inflation in the world’s biggest economy, but dismissed any chance of a rate rise this year.

“In recent months,” Mr Powell said at a news conference after the Fed’s decision, “inflation has shown a lack of further progress toward our 2 per cent objective”. Yields on two-year US Treasury bonds initially fell to 4.95 per cent from 5.01 per cent before tracking back up, while 10-year bond yields dipped by a few basis points before rising again to 4.6 per cent.

“If we did have a path where inflation proves more persistent than expected and the labour market remains strong, but inflation is moving sideways, and we’re not gaining greater confidence, well, that would be a case in which it can be appropriate to hold off on rate cuts,” he said. “I was around for stagflation and it was 10 per cent unemployment, it was high single digits inflation. Right now we have ... 3 per cent growth, which is pretty solid growth, I would say, by any measure, and we have inflation running under 3 per cent.Some analysts think the Fed still had a stronger tilt toward maintaining tight monetary policy.

The US central bank also announced it will scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing only $US25 billion in Treasury bonds to run off each month versus the current $US60 billion. Mortgage-backed securities will continue to run off by up to $US35 billion monthly.

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