Two weeks ago, Federal Reserve Chair Jerome Powell hinted that the Fed was nearing the confidence threshold needed to start cutting its benchmark interest rate, suggesting that inflation was on a sustainable path towards its 2% target level. This suggestion raised hopes of potential economic stimulus through lower lending costs, benefiting sectors from mortgages to business loans. Additionally, such a move could potentially bolster President Joe Biden’s re-election prospects amid widespread public concern over rising prices across the economy.
However, recent inflation data has dashed some of these hopes. A government report revealed that consumer prices surged significantly from January to February, exceeding levels consistent with the Fed’s inflation target. Furthermore, another report indicated unexpectedly high wholesale inflation, suggesting possible inflationary pressures in the pipeline that could prolong elevated consumer price increases in the coming months.
As the Federal Reserve’s interest-rate-setting committee convenes for its latest two-day meeting, Powell and the 18 other officials face a critical question: how, if at all, these inflation figures have impacted their rate-cutting timetable. Powell is expected to address this issue at a news conference following the meeting, where policymakers will also release their updated quarterly projections for the economy and interest rates in the near future. These projections will provide valuable insights into the Fed’s assessment of the economic landscape and its potential policy responses.
The Federal Reserve’s previous quarterly projections in December indicated expectations for three rate cuts in 2024, up from the initial forecast of two cuts. Most economists anticipate that the upcoming projections will maintain the expectation of three rate cuts, though there’s a possibility this number could be reduced to two. The consensus among economists is that the first rate cut could occur in June.
Despite consumer inflation declining from its peak of 9.1% in June 2022 to 3.2%, it has remained above 3%, with costs of services such as rents, hotels, and hospitals staying high in the first two months of 2024. This suggests that the Fed’s rate hikes haven’t sufficiently slowed inflation in the economy’s service sector.
While the Fed’s rate hikes typically impact borrowing costs for big-ticket items like homes and cars, their effect on services spending, which doesn’t usually involve loans, is limited. With the economy still robust, the Fed may not see a compelling reason to cut rates until inflation is sustainably under control. However, there’s a concern that waiting too long to cut rates could lead to an extended period of high borrowing costs, potentially weakening the economy and triggering a recession.
Fed Chair Jerome Powell has indicated that the Fed is gaining confidence in inflation continuing to slow, signaling that rate reductions could be appropriate soon to avoid driving the economy into a recession.
Despite the economy showing resilience, there are indications of potential weakening in the coming months, such as slower spending at retailers and a slight increase in the unemployment rate. Other major central banks are also keeping rates high to address consumer price spikes, with the European Central Bank and the Bank of England facing pressure to lower borrowing costs as inflation drops and economic growth stagnates.
In contrast, Japan’s central bank raised its benchmark rate for the first time in 17 years, responding to rising wages and inflation nearing its 2% target. This move signifies a departure from the prolonged period of negative rates and reflects Japan’s efforts to normalize monetary policy.