Fed Stays on Track for Rate Cuts

Federal Reserve policymakers are largely sticking to their path of interest rate cuts—for now—after hitting a bump on the road to low and steady inflation.

The recent pickup in monthly inflation didn’t sway Fed Chair Jerome Powell’s message Wednesday that price pressures will continue to ease or that it will likely be appropriate to lower rates at some point this year. And a narrow majority of U.S. central bank officials signaled they still expect to cut rates three times in 2024.

Speaking after the Fed’s two-day policy meeting in Washington, Powell also said it would be appropriate to slow the pace at which the Fed reduces its bond holdings “fairly soon.”

But nearly half of Fed officials would prefer two or fewer rate reductions in 2024, according to their updated economic projections, and it’s clear policymakers need more data confirming a downward inflation trend before lowering borrowing costs. They see higher underlying inflation, substantially stronger economic growth, and lower unemployment in 2024 than forecast in December.

“Powell’s basic message is that the underlying story hasn’t changed,” said Bill Dudley, a former New York Fed president and Bloomberg Opinion columnist. “‘We didn’t completely buy into how good the inflation numbers were in the second half of last year. We aren’t completely put off by the bad inflation readings in January and February.’”

Following a series of better-than-expected inflation readings in the second half of 2023, Fed officials had begun discussing the timing and pace of interest-rate reductions. But an acceleration in key price gauges at the start of the year has muddled the picture.

Powell largely shrugged off the higher inflation reports, and traders boosted the probability that the Fed would begin rate cuts in June. The S&P 500 index of U.S. stocks closed at all-time highs.

Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25 percent to 5.5 percent, the highest since 2001, for a fifth straight meeting. They also penciled in just three reductions in 2025, down from the four forecast in December, based on the median projection.

The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence that inflation is moving sustainably toward their 2 percent target.

“We’re kind of right back where we started,” said Omair Sharif, president of Inflation Insights LLC. “We need something to get us over the finish line on rate cuts, and that has to be at least one report that shows that inflation is going back to cooling.”

The Federal Open Market Committee (FOMC) did tweak its language around the labor market, noting “job gains have remained strong,” though the Fed chief said “an unexpected weakening in the labor market could also warrant a policy response.”

Powell emphasized that the broader story of a gradual, sometimes bumpy path toward 2 percent inflation remains intact, but he said the higher inflation prints in January and February didn’t add to policymakers’ confidence. He said it didn’t dent it either.

“We’re looking for data that confirm the kind of low readings that we had last year and give us a higher degree of confidence that what we saw was really inflation moving sustainably down toward 2 percent,” he told reporters. “It is still likely, in most people’s view, that we will achieve that confidence and there will be rate cuts.”

Powell also offered fresh insights into policymakers’ discussions surrounding its balance sheet and efforts to shrink it without creating market turbulence. Some officials, including Dallas Fed President Lorie Logan, have called for an eventual slowing of the pace at which the Fed is shrinking its portfolio of assets.

“The decision to slow the pace of runoff does not mean our balance sheet will shrink, but it allows us to approach that ultimate level more gradually,” he said. “In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility of money markets experiencing stress.”

What Bloomberg Economists Say…

“The key development at the March meeting was elsewhere. Upward revisions to growth and rate forecasts beyond this year suggest more policymakers now believe the neutral interest rate has moved higher—which means it will take a higher fed funds rate to achieve a given level of restrictiveness in the economy.”

— Anna Wong, Stuart Paul, Eliza Winger & Estelle Ou

Policymakers also slightly lifted their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6 percent, from 2.5 percent, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.

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