The Federal Reserve (the US central bank) kept interest rates steady on Wednesday and indicated that it still leans towards final cuts in borrowing costs, but this reduction may be delayed as recent inflation figures drift away from its 2 percent target.

Federal Reserve Chairman Jerome Powell stated that it is likely to take longer than previously expected for Fed officials to be confident that inflation is under control.

The latest Fed policy statement, which was released at the end of a two-day meeting, maintained the main elements of its economic assessment and policy direction as they are, noting that "inflation has moderated" over the past year. In discussing interest rates, it outlined the economic conditions necessary for lowering borrowing costs.

US stocks trimmed some of their losses following the policy statement, while the US dollar fell against a basket of currencies.

Investors are now betting that the US central bank will start cutting interest rates in November, and that it will deliver at least one cut in borrowing costs this year.

The Federal Reserve reiterated in a unanimously approved statement that still indicates that "[the Federal Open Market Committee] does not expect it will be appropriate to lower the target range until more confidence is gained that inflation is moving sustainably toward two percent," noting the next step on interest rates will be lower.

Powell said at a press conference after the meeting, "Inflation remains too high." He added that "making further progress in reducing it is not guaranteed, and the path forward is uncertain."

Powell stated, "It is likely to take longer than previously expected to gain greater confidence."

The timing of the first interest rate cut is in doubt

This leaves the timing of any interest rate cuts in question, as Federal Reserve officials have emphasized their concern that the early months of 2024 have not done much to build the confidence they seek in declining inflation.

The Federal Reserve stated in its statement: "In recent months, there has been no further progress toward the inflation target set by the committee of 2 percent."

BMO Deputy Chief Economist Michael Gregory wrote in a note: "Assuming it will take at least three months of good inflation performance to change the bank's rhetoric, this means the Fed has moved further away from cutting interest rates anytime soon."

Some economists expect the US and Canada to diverge more on monetary policy than previously thought.

While the US economy has continued to expand at a strong pace, Canada disappointed GDP expectations earlier this week, indicating a loss of momentum after a strong start to the year. This has bolstered the view of some analysts that the Bank of Canada will proceed with interest rate cuts at its next meeting in June.

Economists at RBC Nathan Janzen and Claire wrote in a note last month, "We expect an increasing gap between interest rates in Canada and the United States, as weak growth and inflation figures push the Bank of Canada to cut rates before the Fed and at a more aggressive pace thereafter."

The Fed's preferred inflation gauge rose by 2.7% in March

The Federal Reserve also announced it would slow the pace of unwinding one of its largest policies during the coronavirus era: purchasing several trillion dollars in Treasury and mortgage-backed securities, a move aimed at stabilizing financial markets and keeping long-term interest rates down.

The Fed is now allowing $95 billion of those securities to mature each month without replacing them. Its holdings have dropped to about $7.4 trillion, down from $8.9 trillion in June 2022, when it began to trim them, and the Fed said on Wednesday it would reduce its holdings in June at a slower pace, allowing $60 billion of bonds to be drawn down each month.

The benchmark interest rate has remained in its current range of 5.25 to 5.50 percent since July.

Interest rates were expected to be cut as early as March of this year but were postponed after incoming inflation data showed progress toward the 2% target had stalled. The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, rose by 2.7% in March year-over-year.

The Fed's policy statement said, "Inflation remains high." Many analysts feel that the Fed will signal an initial rate cut as soon as this recurring phrase is removed from its statement.

The statement maintained its overall assessment of economic growth, stating that the economy "continued to expand at a strong pace. Job gains remained robust, and the unemployment rate remained low."