UNITED STATES NEWS

Inflation has slowed. Now the Federal Reserve faces expectations for rate cuts

Jan 28, 2024, 8:25 PM

WASHINGTON (AP) — Chair Jerome Powell will enter this week’s Federal Reserve meeting in a much more desirable position than he likely ever expected: Inflation is getting close to the Fed’s target rate, the economy is still growing at a healthy pace, consumers keep spending and the unemployment rate is near a half-century low.

A year ago, most economists had envisioned a much darker outlook. As the Fed raised interest rates at the fastest pace in four decades to fight high inflation, most economists warned of a recession, possibly a painful one, with waves of layoffs and rising unemployment. Even the Fed’s own economists had projected that the economy would sink into a recession in 2023.

The unexpectedly rosy picture — one that’s sure to be subject to heated debate in the 2024 presidential race — may have left some Fed officials saddled by uncertainty. With their frameworks for assessing the economy upended by the pandemic and its aftermath, it’s hard to know whether the economy’s healthy conditions can endure.

“It almost feels like what we saw in the second half of last year was too good to be true,” said Nathan Sheets, chief global economist at Citi and a former Fed economist. “When things are too good to be true, you want to try to scratch the surface and say, how durable is this?”

Some Fed officials have raised similar questions and expressed caution about their next moves. When they last met in December, the Fed’s 19 policymakers who participate in interest-rate decisions said they expected to cut their benchmark rate three times this year. Yet the timing of those rate cuts, which would lead to lower borrowing costs for consumers and businesses, remains uncertain.

Most economists say they expect the first rate cut to occur in May or June, though a cut at the Fed’s March meeting is not off the table. The timing of rate cuts will almost certainly be the top issue at the Fed’s two-day meeting, which ends Wednesday. The Fed is all but sure to announce after the meeting that it’s leaving its key rate unchanged at about 5.4%, where it’s stood since July, its highest point in 22 years.

The central bank’s consideration of rate cuts will take place against an intensifying presidential campaign as President Joe Biden seeks re-election with the economy a polarizing issue. Rate cuts have the potential to provoke an attack from former President Donald Trump, who nominated Powell to be Fed chair but later publicly criticized him for raising rates during the Trump presidency and demanded that he lower them.

At a news conference last month, Powell said: “We don’t think about politics. We think about what’s the right thing to do for the economy.”

On Wednesday, the Fed’s policymakers could signal that they’re close to cutting rates by adjusting the language in the statement they issue after each meeting. In December, the statement still suggested that the officials were willing to consider more rate increases. Removing or altering that language in next week’s statement would signal that they’re shifting to a new approach, focused on rate cuts.

The Fed’s aggressive streak of 11 rate hikes, beginning in March 2022, was intended to tame inflation, which peaked in June 2022 — according to the central bank’s preferred gauge — at 7.1%. But data released Friday showed that over the past six months, inflation has fallen all the way back to the Fed’s 2% annual target level. In the past three months, year-over-over inflation that excludes volatile food and energy costs has dropped to just 1.5%.

Yet Fed officials are expected to wait for at least a few months, to try to build confidence that inflation has been truly beaten, before they start reducing rates.

Christopher Waller, an influential member of the Fed’s governing board, sounded a note of caution in a recent speech.

“Inflation of 2% is our goal,” he said. “But that goal cannot be achieved for just a moment in time. It must be sustained.”

Waller has previously referred to having been “head-faked” on inflation. On more than one occasion, when initial government reports had indicated that inflation was falling, subsequent revisions to the data showed that price increases actually remained high. In his speech, Waller mentioned the government’s upcoming revisions of inflation data, to be released on Feb. 9, as a report he will be watching closely.

It’s possible that inflation could stay undesirably high, especially if the economy remains strong, which could cause the Fed to leave rates unchanged. Fed officials have said that as long as the economy stays healthy, they can take time before cutting rates.

Average paychecks are still increasing at about 4% to 4.5% annually, and apartment rental prices are still rising faster than they did before the pandemic. Officials expect rent prices to cool as a slew of new apartment buildings are completed. But that has yet to show up in the official data. And some prices in the service sector, such as for restaurant meals, are still accelerating.

“We would argue we’re not out of the woods yet,” said Tiffany Wilding, a managing director and economist at PIMCO. “The Fed does not want to be Arthur Burns,” she added, referring to the Fed chair from the 1970s who is widely blamed for cutting rates too soon and allowing inflation to become more deeply entrenched in the economy.

At the same time, the Fed is grappling with an equivalent risk in the other direction: That it might keep its key rate too high for too long and potentially trigger a recession. Consumers spent at a healthy pace in the final three months of last year, but they could eventually pull back in the face of higher borrowing costs and prices that are still well above where they were three years ago.

“They run the risk of overstating their welcome at high rates and slowing the economy down in a way that really isn’t necessary,” said Bill English, a finance professor at the Yale School of Management and a former Fed economist.

Still, the Fed could also accelerate its rate cuts later this year if the economy does weaken, just as it rapidly raised rates after waiting too long to start boosting them in 2022, said Claudia Sahm, founder of Sahm Consulting and a former Fed economist,

“I fully expect them to wait as long as humanly possible to cut rates,” she said. “The Fed excels at being behind the curve.”

United States News

Associated Press

Cause of crash that killed NY couple at Niagara Falls border crossing still a mystery 8 months later

NIAGARA FALLS, N.Y. (AP) — A police investigation into the crash and explosion that killed two people in a high-powered luxury car at a Niagara Falls border crossing last year has concluded with the crash’s cause still a mystery, authorities said. The probe into the Nov. 22, 2023, crash that killed Kurt and Monica Villani, […]

1 hour ago

FILE - A long row of unsold 2021 X3 sports-utility vehicles sits at a BMW dealership Sunday, March ...

Associated Press

BMW recalls over 291,000 SUVs because interior cargo rails can detach in crash, raising injury risk

DETROIT (AP) — BMW is recalling more than 291,000 SUVs in the U.S. because the interior cargo rails can detach in a crash, increasing the risk of injury. The recall covers certain X3 SUVs from the 2018 through 2023 model years. The company says in documents posted by U.S. safety regulators that dealers will replace […]

2 hours ago

Associated Press

Authorities identify victims of fatal plane crash near the site of an air show in Wisconsin

NEKIMI, Wis. (AP) — A Pennsylvania man and a man from New York have been preliminarily identified as the victims of a fatal plane crash near the site of an airshow in eastern Wisconsin. The bodies of Sean Tommervik, 37, of Philadelphia, and James G. Sullivan, 32, of Brooklyn, were found Monday in the wreckage […]

2 hours ago

Associated Press

Fake protest set for TV shoot on NYC campus sparks real demonstration by pro-Palestinian activists

NEW YORK (AP) — A fake protest encampment set up for a TV shoot on a New York City college campus sparked a real reaction from pro-Palestinian activists, who organized their own demonstration against the filming, a newspaper reported Wednesday. The scenario unfolded Monday and Tuesday at Queens College, where the CBS drama “FBI: Most […]

2 hours ago

Lear production worker Abigail Fletcher rides her mini bike in support of the picket line as member...

Associated Press

Strike at plant that makes truck seats forces production stoppage for Missouri General Motors

Production has halted at a Missouri General Motors plant that manufactures trucks and vans, the result of a strike at the company that supplies seats for the vehicles. About 480 workers at Lear Corp. in Wentzville walked out at midnight Sunday. The strike brought production to a standstill Monday at the GM plant in Wentzville, […]

2 hours ago

FILE - Marion County Prosecutor Ryan Mears speaks at a press conference announcing that Raymond Ron...

Associated Press

Mistrial declared in case of Indiana man accused of fatally shooting five, including pregnant woman

INDIANAPOLIS (AP) — A judge declared a mistrial in the case of an Indianapolis man accused of fatally shooting five people, including a pregnant woman, after a witness verbally confronted the defendant in front of the jury. Marion County Superior Judge Chris Miller declared the mistrial Tuesday in the trial of Raymond Ronald Lee Childs […]

3 hours ago

Sponsored Articles

...

Sanderson Ford

3 new rides for 3 new road trips in Arizona

It's time for the Sanderson Ford Memorial Day sale with the Mighty Fine 69 Anniversary, as Sanderson Ford turned 69 years old in May.

...

DESERT INSTITUTE FOR SPINE CARE

Desert Institute for Spine Care is the place for weekend warriors to fix their back pain

Spring has sprung and nothing is better than March in Arizona. The temperatures are perfect and with the beautiful weather, Arizona has become a hotbed for hikers, runners, golfers, pickleball players and all types of weekend warriors.

...

COLLINS COMFORT MASTERS

Here are 5 things Arizona residents need to know about their HVAC system

It's warming back up in the Valley, which means it's time to think about your air conditioning system's preparedness for summer.

Inflation has slowed. Now the Federal Reserve faces expectations for rate cuts