Business
Rate Pause Lifts Markets but Economists Warn of Complacency
The Federal Reserve held rates steady for a third consecutive meeting, sending equities to fresh highs even as inflation data remains mixed and the housing market shows fresh strain.
The Federal Reserve voted unanimously Wednesday to hold its benchmark interest rate at its current target range, a decision that sent equity markets to record closes by the end of the session and reinforced investor expectations that the long rate-cutting cycle may finally be within reach — though policymakers went out of their way to temper that reading.
Chair Elaine Thornbury, delivering remarks after the Federal Open Market Committee's two-day meeting, emphasized that the committee's patience reflected the data rather than a commitment to any particular path. "We are not on autopilot," she said, noting that core services inflation remained above the committee's two-percent target even as headline figures have moderated. "One more good number does not make a trend."
Markets were nonetheless buoyant. The S&P 500 rose 1.4 percent on the day, with rate-sensitive sectors — real estate investment trusts, utilities, and financial technology firms — posting the largest gains. Bond yields fell modestly, as traders revised forward curves to price in two cuts before year-end.
Economists outside the Fed offered more cautious assessments. Several noted that the inflation data underlying the committee's decision showed a landscape that remains genuinely uncertain: goods prices have softened as supply chains normalized, but services inflation, driven heavily by shelter costs and wages in labor-intensive industries, has proven more persistent than models predicted.
"The market is pattern-matching to the 2024 pivot," said Rosamund Kwak, chief economist at Crestbridge Capital. "But that pivot came after inflation had clearly turned. Here, it hasn't clearly turned. We're at a plateau, not a descent." Kwak pointed to the most recent Personal Consumption Expenditures price index, which showed year-over-year core inflation at 2.7 percent, down from a peak of 4.2 but stuck above target for longer than the committee anticipated.
Housing market data added another complication. Existing home sales fell for a fourth consecutive month in May, as potential buyers, conditioned to expect lower rates soon, chose to wait rather than commit to mortgages at current levels. That dynamic has compressed the supply of available homes for sale, keeping prices elevated even as the volume of transactions declines — an unusual divergence that has frustrated both buyers and the Fed's models.
The committee's statement introduced a new formulation that analysts noted with interest: rather than repeating prior language about monitoring incoming data, the statement said the committee would be "prepared to respond to developments that diverge materially from our projections in either direction." The hedge toward the upside — acknowledging the possibility of rate increases rather than only cuts — was read by some as a signal that the Fed considers its work unfinished.
The next scheduled meeting falls in late July, just before the first release of second-quarter GDP data and a few weeks before the August consumer price index report. Those two data points, Thornbury suggested, would be central to any decision made in the fall.
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