After three straight hotter-than-expected inflation reports, Federal Reserve officials have turned more cautious about the prospect of interest rate cuts this year. The big question, after they end their latest policy meeting Wednesday, will be: Will they still signal rate cuts at all this year?

Wall Street traders now envision just a single rate cut this year to the Fed’s benchmark rate, now at a 23-year high of 5.3 percent after 11 hikes that ended last July. Traders have sharply downgraded their expectations since 2024 began, when they had expected up to six rate cuts.

As recently as the Fed’s last meeting March 20, the policymakers themselves had projected three rate reductions in 2024. Rate cuts by the Fed would lead, over time, to lower borrowing costs for consumers and businesses, including for mortgages, auto loans and credit cards.

Most economists say they still expect two cuts this year. But many acknowledge that one or even no rate reductions are possible. The reason is that elevated inflation is proving more persistent than almost anyone had expected. According to the Fed’s preferred gauge, inflation reached a 4.4 percent annual rate in the first three months of this year, up from 1.6 percent in the final quarter of 2023 and far above the Fed’s 2 percent target.

At the same time, the economy is healthier and hiring is stronger than most economists thought it would be at this point. The unemployment rate has remained below 4 percent for more than two years, the longest such streak since the 1960s. During the first quarter of the year, consumers spent at a robust pace. As a result, Chair Jerome Powell and other Fed officials have made clear that they are in no hurry to cut their benchmark rate.

In his most recent remarks two weeks ago, Powell indicated that the pace of price increases had essentially undercut Fed officials’ confidence that inflation was steadily heading back to their target, thereby making rate cuts anytime soon less likely. He also said the Fed would forgo any rate cuts as long as inflation remained elevated. He stopped short, though, of suggesting that any new rate increases were under consideration.

Powell Likely to Signal Lower Inflation Is Needed Before Fed Will Cut Rates

by Banker & Tradesman time to read: 1 min
0