Inflation is nearly back to 2%. So why isn’t the Federal Reserve ready to cut rates?

Feb 8, 2024, 11:22 AM

FILE - A television screen on the floor of the New York Stock Exchange displays the Federal Reserve...

FILE - A television screen on the floor of the New York Stock Exchange displays the Federal Reserve's decision on interest rates, Jan. 31, 2024. From Wall Street investors to car dealers to potential home buyers, many Americans are eager for the Federal Reserve to start cutting its benchmark interest rate and reducing borrowing costs throughout the economy (AP Photo/Richard Drew, File)

(AP Photo/Richard Drew, File)

WASHINGTON (AP) — From Wall Street traders to car dealers to home buyers, Americans are eager for the Federal Reserve to start cutting interest rates and lightening the heavy burden on borrowers.

The Fed is widely expected to do so this year — probably several times. Inflation, as measured by its preferred gauge, rose in the second half of 2023 at an annual rate of about 2% — the Fed’s target level. Yet this week, several central bank officials underscored that they weren’t ready to pull the trigger just yet.

Why, with inflation nearly conquered and interest rates at a 22-year high, isn’t now the time to cut?

Most of the Fed’s policymakers have said they’re optimistic that even as the economy and the job market keep growing, inflation pressures will continue to cool. But they also caution that the economy appears so strong that there’s a real risk that price increases could re-accelerate.

Several officials have said they want more time to see if inflation continues to subside. In the meantime, they note, the economy is solid enough that it can thrive without any rate cuts.

“They’re going to be glacial, and take their time,” said Steven Blitz, chief US economist at GlobalData TS Lombard. “They’re willing to say, ‘We don’t know, but we can afford to wait so we’re going to wait.’ “

The sturdiness of the economy has also raised questions about just how effective the Fed’s 11 rate hikes have been. If much higher borrowing rates are only barely restraining the economy, some officials may conclude that high rates should stay in place longer or that very few rate cuts will be needed.

In the meantime, the economy’s continued resilience gives them the luxury to take a cautious approach. Last month, for example, America’s employers delivered a burst of hiring to begin 2024, adding 353,000 jobs in January. And the unemployment rate stayed at 3.7%, just above a half-century low.

“I don’t feel there’s a sense of urgency here,” Loretta Mester, president of Federal Reserve Bank of Cleveland, told reporters Tuesday. Mester is among 12 Fed officials who vote on interest rate policy this year. “I think later this year, if things evolve as anticipated, we would be able to start moving the rate down.”

Yet their caution carries risks. Right now, the economy appears on track for a “soft landing,” in which inflation would be defeated without causing a recession or high unemployment. But the longer that borrowing rates stay high, the higher the risk that many companies and consumers would stop borrowing and spending, weakening the economy and potentially sending it into a recession.

High rates could also compound the struggles of banks that are saddled with bad commercial real estate loans, which would be harder to refinance at higher rates.

The high cost of borrowing has become a headache for David Kelleher’s Chrysler-Jeep dealership just outside of Philadelphia. Just 2 1/2 years ago, Kelleher recalled, his customers could get an auto loan below 3%. Now, they’re lucky to get 5.5%.

Customers who had monthly car lease payments of $399 three years ago are finding that with vehicle prices much higher now and interest rates up, their monthly payments on a new car would be closer to $650. The trend is pushing many of his customers toward lower-priced used cars — or no purchase at all.

“We need the government to address the interest rates … and understand that they’ve accomplished their goal of lowering inflation,” Kelleher said. “If interest rates can come down, I think we’re going to start selling more cars.”

Kelleher is likely to get his wish by May or June, when most economists expect the Fed to start reducing its benchmark rate, which is now at about 5.4%. In December, all but two of the 19 policymakers that participate in the Fed’s policy discussions said they expect the central bank to cut rates this year. (Twelve of those 19 actually get to vote on rate policies each year.)

Yet economic growth, by some measures, has accelerated since then. In the final three months of last year, the economy expanded at an unexpectedly strong 3.3% annual rate. Surveys of manufacturers and service-providers, such as retailers, banks, and shippers, also reported that business perked up last month.

Collectively, the latest reports suggest that the economy may not be headed for a soft landing but rather what some economists call a “no landing.” By that they mean a scenario in which the economy would remain robust and inflation an ongoing threat, potentially stuck above the Fed’s target. Under this scenario, the Fed would feel compelled to keep rates at elevated levels for an extended period.

Powell said last week that while the Fed wants to see continued “strong growth,” a strong economy does threaten to send inflation up.

“I think that is a risk … that inflation would accelerate,” Powell said. “I think the greater risk is that it would stabilize at a level meaningfully above 2%. … That’s why we keep our options open here and why we’re not rushing.”

Other officials this week drove home the point that the Fed is trying to balance the risk of cutting rates too soon — which might cause inflation to re-accelerate — and keeping rates too high for too long, which could trigger a recession.

“At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce” rates, Andrea Kugler, a recently appointed Fed governor said Wednesday in her first public speech. “On the other hand, if progress on disinflation stalls, it may be appropriate to hold the target range steady at its current level for longer.”

Some analysts have pointed to signs that the economy is becoming more productive, or efficient, allowing it grow faster without necessarily increasing inflation. Yet productivity data is notoriously hard to measure, and any meaningful improvement wouldn’t necessarily become apparent for years.

Still, “maybe the economy can take higher interest rates than we thought in 2019 before the pandemic,” said Eric Swanson, an economist at the University of California, Irvine.

If so, that might not just delay the Fed’s rate cuts, but result in fewer of them. Fed officials are still saying they plan to cut rates perhaps three times this year, below the five or six that some market analysts foresee.

United States News

Associated Press

‘Catch-and-kill’ to be described to jurors as testimony resumes in hush money trial of Donald Trump

NEW YORK (AP) — A longtime tabloid publisher was expected Tuesday to tell jurors about his efforts to help Donald Trump stifle unflattering stories during the 2016 campaign as testimony resumes in the historic hush money trial of the former president. David Pecker, the former National Enquirer publisher who prosecutors say worked with Trump and […]

7 hours ago

Associated Press

America’s child care crisis is holding back moms without college degrees

AUBURN, Wash. (AP) — After a series of lower-paying jobs, Nicole Slemp finally landed one she loved. She was a secretary for Washington’s child services department, a job that came with her own cubicle, and she had a knack for working with families in difficult situations. Slemp expected to return to work after having her […]

7 hours ago

Several hundred students and pro-Palestinian supporters rally at the intersection of Grove and Coll...

Associated Press

Pro-Palestinian protests sweep US college campuses following mass arrests at Columbia

NEW YORK (AP) — Columbia canceled in-person classes, dozens of protesters were arrested at New York University and Yale, and the gates to Harvard Yard were closed to the public Monday as some of the most prestigious U.S. universities sought to defuse campus tensions over Israel’s war with Hamas. More than 100 pro-Palestinian demonstrators who […]

9 hours ago

Ban on sleeping outdoors under consideration in Supreme Court...

Associated Press

With homelessness on the rise, the Supreme Court weighs bans on sleeping outdoors

The Supreme Court is wrestling with major questions about the growing issue of homelessness as it considers a ban on sleeping outdoors.

10 hours ago

Arizona judge declares mistrial in case of rancher who shot migrant...

Associated Press

Arizona judge declares mistrial in the case of a rancher accused of fatally shooting a migrant

An Arizona judge declared a mistrial in the case of rancher accused of killing a Mexican man on his property near the U.S.-Mexico border.

10 hours ago

Associated Press

Trial opens for former Virginia hospital medical director accused of sexual abuse of ex-patients

NEW KENT, Va. (AP) — The former longtime medical director of a Virginia hospital that serves vulnerable children used physical examinations as a “ruse” to sexually abuse two teenage patients, a prosecutor said Monday, while the physician’s attorney “adamantly” denied any inappropriate conduct. The trial of Daniel N. Davidow of Richmond, who for decades served […]

11 hours ago

Sponsored Articles


Condor Airlines

Condor Airlines can get you smoothly from Phoenix to Frankfurt on new A330-900neo airplane

Adventure Awaits! And there's no better way to experience the vacation of your dreams than traveling with Condor Airlines.


Fiesta Bowl Foundation

The 51st annual Vrbo Fiesta Bowl Parade is excitingly upon us

The 51st annual Vrbo Fiesta Bowl Parade presented by Lerner & Rowe is upon us! The attraction honors Arizona and the history of the game.


Collins Comfort Masters

Avoid a potential emergency and get your home’s heating and furnace safety checked

With the weather getting colder throughout the Valley, the best time to make sure your heating is all up to date is now. 

Inflation is nearly back to 2%. So why isn’t the Federal Reserve ready to cut rates?