By CHRISTOPHER RUGABER (AP Economics Writer)
Federal Reserve officials indicated on Wednesday that they still anticipate cutting their main interest rate three times in 2024, even though there were signs that inflation remained unexpectedly high at the beginning of the year. However, they predict fewer rate cuts in 2025, and slightly increased their inflation forecasts.
Following their latest meeting, the officials decided to keep their benchmark interest rate unchanged for the fifth consecutive time.
In the new quarterly projections they released, the Fed officials projected that stronger growth and persistent inflation would continue this year and next. Consequently, they anticipated that interest rates would need to remain slightly higher for a longer period.
They now predict three rate cuts in 2025, down from four in their December projections. Rate cuts would eventually lead to reduced costs for home and auto loans, credit card borrowing, and business loans. They could also support President Joe Biden’s re-election campaign, which faces widespread public dissatisfaction with higher prices and could benefit from an economic boost resulting from lower borrowing rates.
The Fed’s policymakers also anticipate that “core” inflation, which excludes volatile food and energy costs, will still be 2.6% by the end of 2024, up from their previous projection of 2.4%. In January, core inflation was 2.8%, according to the Fed’s preferred measure.
Overall, Wednesday’s forecasts suggest that the policymakers expect the U.S. economy to continue experiencing an unusual combination: a strong job market and economy alongside inflation that continues to decrease — just at a slower pace than they had predicted three months ago.
The Fed’s officials indicated that they now anticipate their benchmark rate to be higher in the future than it has been in recent years — high enough to control inflation, but low enough to sustain economic growth. They had previously set this “neutral rate” at 2.5%. However, on Wednesday, the officials estimated that it is now 2.6%. If this is the case, it means that rates are less likely to return to the extremely low levels that prevailed for years before the pandemic hit.
When the Fed raises its benchmark rate above the neutral rate, it aims to slow growth and mitigate inflation. If the neutral rate is actually higher than the Fed had anticipated, it means its key rate should also be higher to cool down the economy and inflation.
Most economists have identified the Fed’s June meeting as the most probable time for it to announce its first rate cut, which would begin to reverse the 11 increases it implemented two years ago. The Fed’s increases have helped reduce annual inflation from a peak of 9.1% in June 2022 to 3.2%. However, they have also made borrowing much more expensive for businesses and households.
Two recent government reports indicated higher-than-expected inflation. One report showed that consumer prices rose from January to February by a much higher amount than is in line with the Fed’s target. The second report indicated that wholesale inflation was surprisingly high — a potential sign of inflation pressures in the pipeline that could cause consumer price increases to remain elevated.
Chair Jerome Powell and the 18 other members of the Fed's group that decides on interest rates have been thinking about how those numbers should influence their plan to decrease rates.
While consumer prices have fallen since mid-2022, they have stayed above 3%. In the first two months of 2024, the prices of services like rents, hotels, and hospital stays have stayed high. This suggests that high borrowing rates have not been effective in slowing inflation in the service sector of the economy.
When the Fed raises rates, it makes borrowing more expensive for expensive items like homes, cars, and appliances. However, it has less impact on spending for services, which usually does not involve loans. Since the economy is still strong, there is no urgent reason for the Fed to decrease rates until they believe inflation is under control for the long-term.
At the same time, the central bank has another concern: waiting too long to cut rates could seriously harm the economy and possibly lead it into a recession due to a prolonged period of high borrowing costs.
Powell warned about this possibility when he spoke to the Senate Banking Committee this month. He said the Fed is more confident that inflation is continuing to slow, even though the progress is not consistent.
Overall, the U.S. economy is still doing very well. Employers are hiring, unemployment is low, and the stock market is at record highs. However, average consumer prices are much higher than before the pandemic, which has made many Americans unhappy. Republicans have tried to blame Biden for this.
There are signs that the economy might weaken in the next few months. For example, Americans spent less at retail stores in January and February. The unemployment rate is now at 3.9%, which is still low but higher than the record low of 3.4% last year. Most of the recent hiring has been in government, health care, and private education, while other industries have added very few jobs.
Other major central banks are also keeping rates high to control consumer price increases. In Europe, there is pressure to reduce borrowing costs as inflation drops and economic growth slows down. The leader of the European Central Bank suggested a possible rate cut in June, while the Bank of England is not expected to indicate an immediate cut at their upcoming meeting.
Japan's central bank is doing the opposite: they raised their benchmark rate for the first time in 17 years in response to rising wages and inflation that is finally close to its 2% target. The Bank of Japan was the last major central bank to increase its key rate from negative territory. This ended a rare period where some European countries and Japan had negative rates.
