Americans may be impatiently waiting for lending costs to go down, but the Federal Reserve isn’t cutting interest rates just yet. On Wednesday, the central bank opted to pause the federal funds rate at 5.25%-5.50%.
The stock market spiked upward in response to the Fed’s announcement, which included the likelihood of three rate cuts this year.
The move wasn’t unexpected — at the last meeting of the Federal Open Market Committee (FOMC) in January, Fed Chair Jerome Powell said he didn’t anticipate a rate cut at the March 19-20 meeting. The last rate hike was in July 2023, which means Wednesday's decision marked the fifth pause in a row since the central bank first began raising rates in March 2022 to combat high inflation. The Fed’s target inflation rate is 2%.
It likely remains a question of when, not if, the Fed will lower rates this year. But Powell says the committee is still waiting for economic data that shows inflation is coming down sustainably.
“We're in a situation where if we ease too much or too soon, we could see inflation come back,” said Powell. “And if we ease too late, we could do unnecessary harm to employment and people's working lives. And so we do see the risks as two-sided.”
Rate cuts still expected in 2024
The FOMC still forecasts three cuts this year (a 75-basis-point reduction). But there is one change from January’s meeting: Some committee members’ expectations now skew toward just one or two cuts in 2024.
The Fed is expected to weigh data from multiple federal sources before the next meeting April 30-May 1. That includes the advance estimates of the first quarter gross domestic product (GDP) report; two personal consumption expenditure PCE reports — the inflation proxy the Fed values most; one more consumer price index (CPI) report — another inflation proxy; along with employment data for March.
Recent months’ inflation data has come in hotter than expected compared with the steady slowdown in growth through much of last year. But Powell said that data hasn’t changed the overall story, which he describes as “inflation moving down gradually on a sometimes bumpy road toward 2%.”
One of the bumpier factors in inflation has been housing services, which have been consistently the biggest contributor to inflation in recent reports. Current market rents suggest price growth declines since last spring, but that’s yet to be reflected in inflation reports.
Powell said there’s confidence that lower housing market rent increases will be reflected in inflation data, but when that might happen remains uncertain. “There’s real confidence that they will show up eventually, over time,” he said.
The Fed is also factoring labor market data into its decisions. Reports show the labor market has remained strong while also showing the cooling that the Fed is watching for. Looking forward, Powell said that strong job growth, on its own, isn't a reason to be concerned about inflation.
After the central bank’s announcement and Powell’s press conference, the futures market’s CME FedWatch tool still overwhelmingly predicts another pause at the Fed’s May 1 meeting.
(Photo by Win McNamee/Getty Images News via Getty Images)
