The Fed keeps its rates stable and plans three cuts this year

Federal Reserve officials left interest rates unchanged Wednesday and continued to forecast that borrowing costs would decline somewhat by the end of the year as inflation slows.

Fed policymakers have been battling rapid inflation for two full years as of this month, and while they have been encouraged by recent progress, they are not yet ready to declare victory over rising prices. In this context, they are keeping interest rates at a high level which is expected to weigh on growth and inflation, even as they signal that rate cuts are likely in the coming months.

Officials kept interest rates steady at around 5.3 percent, where they have been since July, in their March report. political decision.

Policymakers also released a new set of quarterly economic estimates for the first time since December, and those predicting borrowing costs will end 2024 at 4.6 percent. This unchanged forecast suggests they still expect to cut rates by three-quarters of a point this year.

Central bankers are trying to guide the economy toward a soft landing — a situation in which inflation returns to normal without a painful economic slowdown that pushes unemployment sharply higher. They want to make sure they keep interest rates high enough to fully control rising prices, but they also want to avoid overdoing it and causing a recession.

“The risks are really twofold here: We are in a situation where if we ease too much or too soon, we could see inflation come back,” Jerome H. Powell, Chairman of the Fed, explained during a press conference Wednesday. . “If we relax too late, we could harm jobs unnecessarily. »

Given these risks, policymakers are moving toward rate cuts only cautiously. Mr. Powell avoided giving any indication when asked when rate cuts might begin, in a clear effort to keep the Fed's options open.

Given that the Fed has not yet started cutting rates, at least some of the expected cuts this year could come in the months leading up to the November election. This could expose the central bank to criticism. Former President Donald J. Trump, who often pushed for lower interest rates while in office, once suggested it would “policy» for Mr. Powell to reduce borrowing costs before the election.

But Yelena Shulyatyeva, senior economist at BNP Paribas, noted that the rate cuts would likely come well before the elections. Many economists and investors now expect a move in June. And Gennadiy Goldberg, rates strategist at TD Securities, said Fed officials could offset any political risk by clearly explaining why they took these actions: because economic conditions have changed.

“They will do their best to avoid any perception of impropriety,” Mr. Goldberg said, explaining that the Fed, which is independent of the White House, had adjusted borrowing costs in elections years before, and that It was just a matter of “communication”. »

Rate cuts would mark a new step in the Fed's fight against inflation.

Fed officials quickly raised rates between March 2022 and mid-2023 in an effort to rein in the economy. But they stopped those increases after July, largely because inflation began falling sharply toward the end of last year.

Price increases today are much more moderate than they were a few years ago. THE Measurement of the consumer price index stood at 3.2% in February, down sharply from a peak of 9.1% in 2022. The Fed's preferred inflation measure, the personal consumption expenditures index, appears with more behind, but it is also down considerably. He stood at 2.8 percent in January after deducting food and fuel costs to get a sense of the underlying “core” price trend.

Fed officials have indicated in recent months that they expect interest rates to be cut this year because lower inflation means the Fed does not need to slow the economy as aggressively .

High interest rates weigh on demand by making it more expensive to borrow to buy a home or expand a business, setting off a chain reaction that ripples through the economy and chills the job market. This helps curb inflation, but it also risks creating a painful recession.

Still, inflation remains above the Fed's 2% target even after progress in 2023, and its decline has recently stopped. January and February inflation figures were hotter than expected. Officials are still hopeful that price increases will continue to fade this year, but they are keeping an eye on incoming data for any indications that they might be wrong.

Policymakers have suggested they need greater “confidence” that inflation will return to 2% before they start cutting interest rates.

The recent rise in prices “certainly hasn't improved our confidence,” Mr. Powell said, noting that the Fed doesn't “really know whether this was a bump in the road or something more — We’ll have to find out.” .”

Mr. Powell said a few months of warmer inflation data, however, was not enough to suggest that progress in reducing inflation was being reversed.

“They haven't really changed the whole picture,” he said, explaining that inflation is gradually falling on a “sometimes rocky path” to 2 percent.

Mr. Powell made clear that officials were watching inflation closely while considering interest rate developments, but were also looking at other economic conditions.

The economy has maintained surprising momentum while interest rates are near their highest level in two decades. Fed officials expect growth to be stronger in 2024, 2025 and 2026 than expected, based on their new estimates. Officials also expect the unemployment rate to remain slightly lower this year than they previously forecast.

Mr. Powell suggested that a strong labor market would not in itself be a reason not to cut interest rates. Last year, the job market saw strong growth thanks to an influx of immigrants and other workers, but that didn't stop inflation from slowing.

But if the economy maintains more strength, that could mean it will take higher interest rates to slow it down over time.

Officials predicted they might cut rates in 2025 a little less than expected, removing a rate cut from their forecast for next year.

The Fed also discussed its plans for its bond balance sheet at this meeting. Mr. Powell said officials had not made any decisions, but he signaled that they may soon begin to slow down their efforts to reduce their security holdings.

The Fed's balance sheet has expanded during the pandemic as the central bank has purchased bonds in huge quantities, first to calm markets and then to stimulate the economy. Authorities want to bring these assets back to more normal levels to avoid playing such a large role in financial markets. At the same time, they want to avoid exaggerating in the reduction to the point of risking market disruptions.

But for now, markets are paying close attention to what is likely to happen with interest rates: how far they will fall and when that might start.

Stocks rose as Mr. Powell spoke, perhaps interpreting his comments as a sign that officials are still willing to cut rates as long as progress on inflation continues.

“We are looking for more reliable data, and we would certainly welcome it,” concluded Mr. Powell.

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