Americans facing high borrowing costs on car loans, mortgages, and credit cards may not see relief this year, as some Federal Reserve officials are reassessing their previous forecasts for rate cuts in 2024.
Currently, the Fed’s target interest rate stands between 5.25% and 5.5%, marking a 23-year high. Recent economic projections from the Fed’s rate-setting committee indicate that four of the 19 officials foresee rates remaining above 5% for the year, suggesting the possibility of one or no rate cuts. This represents a shift from December when only three officials anticipated rates staying above 5%. Conversely, the number of officials expecting rates to drop below 4.5%, indicating potential cuts, has decreased from five to one.
The debate over when to adjust interest rates carries significant implications. Cutting rates prematurely could jeopardize the Fed’s control over inflation, which has yet to reach its 2% target. However, delaying rate cuts could exacerbate the burden of high interest rates on individuals and the economy, potentially leading to a recession.
In addition to their official projections, Fed officials have been expressing their views through public speeches and media appearances, highlighting the complexities of determining the optimal timing for rate adjustments.
Atlanta Fed President Raphael Bostic, a current voting member on the Fed’s rate-setting committee, has advocated for a cautious approach, suggesting that the central bank should consider only one rate cut this year. Bostic cited the economy’s resilience and strength, leading him to revise his previous expectation of two rate cuts to just one for the year. This sentiment reflects the ongoing uncertainties surrounding economic conditions and the Fed’s response to evolving challenges.
First rate cut hinges on inflation data
In February, Atlanta Fed President Raphael Bostic suggested to CNN that the first rate cut could potentially occur “sometime in the summertime,” aligning with the current expectations on Wall Street.
Federal Reserve Chair Jerome Powell has not publicly disclosed a specific timeline for rate cuts but has emphasized that the decision will hinge on the readings of inflation indicators and other key economic metrics. This cautious approach has prompted some investors, who previously anticipated multiple rate cuts in 2024, to reassess their forecasts.
The inflation data for the first two months of the year revealed higher-than-expected readings, indicating persistent price pressures, particularly in services and housing sectors. Escalating shelter costs and rising gasoline prices accounted for a significant portion of the monthly increase in consumer prices in February, with the Consumer Price Index registering a 3.2% uptick from a year earlier, surpassing economists’ projections of a 3.1% annual rise. Similarly, the Producer Price Index surged at its fastest pace in months during February.
Even the Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, reflected stubborn price trends in January, suggesting a continued challenge in curbing inflationary pressures.
David Page, head of macroeconomic research at investment management firm AXA IM, expressed skepticism about inflation showing signs of stalling, anticipating that softening consumer spending and labor market conditions could eventually translate into increased services and shelter inflation in the coming months.
While concerns about inflation no longer decelerating pose a significant worry for Wall Street, economists still anticipate a gradual decline in inflation, albeit perhaps not to the extent previously anticipated by overly optimistic investors. This nuanced outlook underscores the ongoing uncertainty surrounding inflation dynamics and the potential implications for monetary policy decisions.
The Fed is still in wait-and-see mode
Federal Reserve Chair Jerome Powell indicated last week that the notable uptick in prices observed in January may have been influenced by “seasonal factors,” suggesting that it does not necessarily signify a halt in the cooling of inflation.
Powell refrained from specifying the exact number of rate cuts he deems appropriate for the current year, a sentiment unlikely to change in forthcoming communications. Instead, he emphasized during last week’s meeting that he and his fellow Fed officials are seeking “more confidence that inflation is coming down sustainably toward 2%.”
Consequently, the Federal Reserve is poised to maintain interest rates at their current levels as officials await additional data to ascertain whether inflation is indeed on a trajectory toward the targeted 2%.
In a lecture delivered at Harvard University on Monday, Fed Governor Lisa Cook underscored the importance of a cautious approach to further policy adjustments, emphasizing the need to ensure that inflation returns consistently to the 2% benchmark while striving to uphold a robust labor market.
In essence, Cook’s remarks suggest that there is no rush to implement rate cuts, even amid less-than-ideal recent inflationary indicators. This cautious stance reflects the Fed’s commitment to navigating the path of disinflation judiciously, prioritizing sustainable inflation trends and labor market strength.
The case for three cuts
Chicago Fed President Austan Goolsbee remains steadfast in his belief that three rate cuts this year align with his perspective on the economic landscape. Despite acknowledging the prevailing uncertainty, Goolsbee emphasized that the fundamental narrative of the economy converging back to the Federal Reserve’s inflation target remains unchanged. In an interview with Yahoo Finance on Monday, Goolsbee, who is not currently part of the interest rate decision-making committee, expressed his stance.
However, Federal Reserve Chair Jerome Powell articulated a different viewpoint at December’s meeting, asserting that waiting for inflation to reach the Fed’s target before initiating rate cuts would be ill-advised as it might be too late. Powell highlighted the concept of “long and variable lags” in monetary policy, indicating that it takes time for the full impact of interest rate adjustments to permeate through the economy. This consideration underscores why some officials may still be contemplating three rate cuts this year, despite encountering less-than-desirable inflation data.
Fed Governor Christopher Waller, recognized as a pivotal communicator of the Fed’s policy guidance, is scheduled to deliver a speech on the economy in New York on Wednesday. Waller has expressed optimism regarding the decline in inflation and suggested that further improvements in this area could potentially pave the way for rate cuts, contingent upon real-world outcomes.
Later in the week, Powell is slated to engage in a discussion on monetary policy organized by the San Francisco Fed, providing another platform for insights into the central bank’s approach amidst evolving economic conditions.