Federal Reserve officials kept interest rates at their highest level in more than two decades at their first meeting of 2024 and hinted that their next step will be to reduce borrowing costs, even as policymakers made clear who are not yet ready to make that cut.
Jerome H. Powell, chairman of the Federal Reserve, said the country had had “six good months” of moderation in inflation, but officials wanted to see continued progress before lowering rates.
“We believe that our policy rate is likely to be at its peak for this tightening cycle, and that if the economy broadly evolves as expected, it will probably be appropriate to begin tapering policy moderation at some point this year,” he said. Powell. He added that when it comes to gaining enough confidence to reduce borrowing costs, “we want to see more good data.”
Powell said he did not believe it was “likely” that Federal Reserve officials had enough evidence to reduce interest rates to their extent. Next meeting on March 19 and 20. That could leave investors looking ahead to later meetings – such as those in May and June – as they consider when the first rate cut might come.
Wall Street expected imminent rate cuts and stock prices plummeted following the Federal Reserve meeting and Powell’s comments. Investors are increasingly betting that borrowing costs will remain unchanged in March.
Central bankers are trying to keep their options open as they try to strike a delicate balance. They don’t want to keep interest rates too high for too long, which would crush growth. At the same time, they don’t want to lower rates prematurely, risking a spike in demand that could keep inflation high.
“The bottom line is they’re still on the fence,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “Cuts are coming. “It’s a question of when and not if.”
The Federal Reserve’s key interest rate is set in a range of 5.25 to 5.5 percent, a sharp increase from near zero in March 2022. High interest rates are intended to weigh on economic demand by make it more expensive to borrow money to buy a house. or a car or expanding a business, and officials think their current stance is high enough to significantly influence growth.
Given this, the authorities have kept interest rates stable since July 2023 to see how their policy is affecting the economy, and they have received good news in recent months. Inflation has been falling rapidly even as the labor market remains strong and overall growth remains strong. That has raised hopes that the economy can achieve a “soft landing,” in which inflation returns to a normal pace without a painful recession.
Now, Federal Reserve officials remain flexible as they try to achieve that goal.
“We know that reducing policy moderation too soon or too much could result in a reversal of the progress we’ve seen on inflation,” Powell said during his news conference. “At the same time, reducing political moderation too late or too little could unduly weaken economic activity and employment.”
As it tries to strike a balance, the Federal Reserve avoids locking itself into any firm plan.
If inflation were to come faster than expected, “then we’ll go slower or later, or both,” Powell said. Good inflation data “would tell us that we could move forward sooner, and perhaps faster.”
The Federal Reserve’s latest economic forecast, released in December, predicted that officials could reduce borrowing costs by three-quarters of a percentage point over the course of 2024. Officials will release a new set of those economic and interest rate projections at their March meeting, providing an update on whether they still believe cuts of that magnitude are likely appropriate.
The resilience of the US economy has surprised many forecasters since the Federal Reserve’s latest estimates. Consumers continue to spend at a solid pace, overall growth exceeded expectations toward the end of 2023, and the labor market continues to advance.
At the same time, the labor market is showing some signs of rebalancing after a red-hot hiring period. Job offers are lower than they were. Wage growth has slowed somewhat.
And strong demand has been accompanied by a steady slowdown in price increases. The Consumer Price Index, a measure of inflation, peaked at 9.1 percent in the summer of 2022, but has now dropped to 3.4 percent. This figure is still faster than the normal roughly 2 percent, but recent progress has been steadier than many economists expected.
Federal Reserve policy aims to cool inflation by slowing the economy, so some economists had speculated that strong growth could prompt officials to keep interest rates high longer. But Powell emphasized Wednesday that the Federal Reserve was not bent on weakening the economy and labor market as long as price increases continued to cool.
“We are not looking for a weaker labor market,” Powell said. “We expect inflation to continue to fall as it has been falling for the last six months.”
Still, risks to inflation remain, including some that could emerge before the next Federal Reserve meeting.
The adjustments to the measure of consumer prices will be released on February 9 which could make progress toward cooling inflation appear better or worse than in initial reports. Economists are still waiting for the expected slowdown in housing-related inflation to fully materialize.
Global forces could also drive up prices. For example, geopolitical turmoil in the Middle East could cripple recovering supply chains or drive up gas prices, if it lasts or worsens.
Those threats are enough to prevent the Federal Reserve from declaring inflation defeated. Powell said he was more concerned about inflation stagnating at a higher-than-normal pace than a full acceleration, but that policymakers are watching for all risks.
Still, the overall tone of both the Fed’s statement and the press conference was unquestionably optimistic: Powell embraced strong growth, praised continued labor market gains, and expressed hope that a return to normal inflation would continue. .
Asked if he was willing to say the economy had achieved a “soft landing,” he said not yet, but also hinted that the goal was in sight.
“I’m certainly encouraged, and we are encouraged, by the progress,” he said. “But we are not declaring any victories at this time.”
