Fed holds interest rates at 23-year high as inflation continues to push back timing of a rate cut

US markets closed mixed on Wednesday on a volatile day of trading.

Stocks spent the morning largely unchanged before jumping higher when Federal Reserve Chair Jerome Powell indicated during a press conference that policymakers believed it was unlikely that they they would raise rates again in this cycle.

Investors, however, were unable to sustain the rally and the S&P 500 and tech-heavy Nasdaq fell again to close the day lower.

The blue-chip Dow ended Wednesday higher by 87 points, or 0.2%. The S&P 500 fell by 0.3% and the Nasdaq was also down 0.3%.

Wall Street ultimately was unable to snap April's losing streak. All three major indexes closed out last month lower after five months of gains. The Dow notched its worst month since September 2022.

In earnings news, shares of chip stocks fell after Advanced Micro Devices, or AMD, issued a lackluster earnings report. Shares of AMD were down 9% on Wednesday. Shares of Super Micro Computer also slid, ending the day 14% lower. Nvidia fell about 4%.

As stocks settle after the trading day, levels might still change slightly.

The US unemployment rate has stayed below 4% for more than two years, a remarkable streak that hasn't been matched in decades.

But many economists thought the jobless rate would be well above 4% by now, given all the rate hikes aimed at slowing the economy to curb inflation. Well, it may only be a matter of time before the streak of a sub-4% unemployment ends.

What would that mean for the Federal Reserve? Not a whole lot, Fed Chair Jerome Powell said Wednesday.

As of last month's jobs report, the unemployment rate is at 3.8%. It would take a material weakening in the labor market to catch central bankers' attention and potentially cause them to consider cutting rates sooner.

A couple of tenths of a percentage point increase in the unemployment rate "would probably not do that," Powell said.

If you’re carrying a lot of high-interest debt, the fact that the Federal Reserve once again did not cut interest rates at its Wednesday meeting may be disappointing, if not surprising.

But if you have any savings, the Fed’s unwillingness to lower rates until it sees more consistent progress in inflation data has – and will continue to – put money in your pocket this year if you seek out federally insured accounts with the highest rates.

In 2023, savers made $315.4 billion in interest in deposit accounts, four times the $78.7 billion they earned in 2022, according to Lending Tree’s DepositAccounts.com, which used data from the Federal Deposit Insurance Corporation in its calculations.

That’s because, after so many years of paltry interest rates, the Fed’s rate-hike campaign that began in 2022 made it possible for savers to earn inflation-beating yields on their US domestic deposits, including bank and credit union savings accounts, certificates of deposit and money market accounts.

At the same time, yields on Treasury bills have also been very competitive with the higher rates banks are offering and are equally low risk.

Read more here about how to grow your savings while the growing is good.

When asked whether the upcoming 2024 election may influence the Fed's interest policymaking decisions, Federal Reserve Chair Jerome Powell stressed the central bank's independence from politics.

The Fed chair said that mixing politics with the Fed's economic calculations would "reduce the likelihood we'd actually get the economics right."

"We're always going to do what we think the right thing for the economy is," Powell said. "That's what we do. We're not looking at anything else."

"I can't say it enough: We just don't go down that road," he added.

The latest gross domestic product report showing that economic growth slowed as inflation accelerated sparked concerns about stagflation, which is the combination of those two factors.

But Federal Reserve Chair Jerome Powell said those concerns are misguided.

"I was around for stagflation. It was 10% unemployment. It was high single-digits inflation and very slow growth," he said, referring to one of the worst bouts of stagflation that happened in the 1970s after a spike in oil prices during the Arab oil embargo.

Right now, economic growth is "pretty solid" and the Fed's preferred inflation gauge is under 3%, Powell said. "I don't see the stag or the 'flation."

US markets surged Wednesday afternoon after Federal Reserve Chair Jerome Powell indicated twice during a press conference that policymakers believed interest rate policy was already "restrictive" enough and that it was "unlikely" that they they would raise rates again in this cycle.

The Dow gained nearly 500 points, or 1.3%. The S&P 500 was up 1% and the tech-heavy Nasdaq was up 1.5%.

Leading up to the Federal Reserve's May meeting, a few officials have floated the need to potentially raise interest rates even higher to rein in inflation.

But Federal Reserve Chair Jerome Powell said Wednesday it's "unlikely that the next policy rate move will be a hike."

At the same time, he did not give any assurance of a rate cut this year, which investors continue to believe will occur, though their timetable has been pushed later into the year.

Powell reiterated that central bank policy decisions will depend on how the economy is evolving. At the last meeting, Fed officials' median projections called for three rate cuts this year.

When asked by a reporter if that would still be realistic given the Fed meets five more times this year, Powell responded, "I'm not really thinking of it that way." He said Fed officials still aren't confident inflation is sustainably heading back to the Fed's 2% target but said that when they do get that confidence, "rate cuts will be in scope."

Powell noted that his own "confidence in that is lower than it was" at previous meetings.

Yields on US Treasuries tumbled after the Federal Reserve announced its decision to leave interest rates unchanged. But that's likely not what's driving yields lower.

In the Fed's statement, it said it would be significantly slowing the pace at which it allows its holdings, namely US Treasuries, to mature without reinvesting them. That brought the yield on the 10-year Treasury note to fresh lows for the day.

US stocks, meanwhile, remained relatively unchanged following the announcement.

The blue-chip Dow was 157 points, or 0.4% higher. The S&P 500 was 0.1% lower and the tech-heavy Nasdaq remained flat.

The Federal Reserve just announced it is keeping interest rates on hold at a 23-year high.

Here's what Wall Street has to say: