The Federal Reserve indicated Wednesday that it’s nearing a long-awaited shift toward cutting interest rates, a sign that officials are confident that they’re close to fully taming inflation. The Fed kept its key rate unchanged at about 5.4%, a 22-year high. But in a statement, it signaled a shift by dropping previous wording that had said it was still considering further hikes.
Quick Read
- Fed’s Rate Strategy: The Federal Reserve signaled a potential shift towards cutting interest rates, suggesting confidence in nearing its inflation control goals.
- Current Rate Unchanged: The key rate remains at about 5.4%, the highest in 22 years, with the Fed removing previous language about further hikes.
- Cautious Approach: The Fed indicated that rate cuts would only occur once there’s greater confidence that inflation is sustainably moving towards the 2% target, hinting that cuts are unlikely by March.
- Economic Resilience: Despite 11 rate hikes, the economy shows durability with inflation significantly slowing and growth remaining robust, evidenced by a 3.3% annual growth rate in the last quarter of the previous year.
- Political and Economic Landscape: The Fed’s decisions are set against a backdrop of the presidential campaign and debates over economic management, with recent data showing steady consumer spending, job growth, and slowing inflation.
- Rate Cut Expectations: Economists anticipate rate cuts to begin around May or June, which would lower borrowing costs for consumers and businesses.
- Labor Market Stability: Contrary to earlier recession predictions, the job market has remained steady, with the unemployment rate close to a 50-year low and labor costs starting to ease.
- “Soft Landing” Possibility: The Fed might achieve a “soft landing” by controlling inflation without triggering a recession, though economic acceleration could rekindle inflation concerns.
- Potential Economic Slowdown Signs: Emerging job market weaknesses and a decrease in job quits suggest possible economic cooling, which could prompt quicker Fed action on rate cuts.
- Global Economic Comparison: The U.S. economy is performing better than many international counterparts, with the eurozone barely avoiding recession and similar inflation slowdowns and unemployment trends.
The Associated Press has the story:
Fed leaves interest rate unchanged, says more ‘confidence’ needed on inflation before cuts
Newslooks- WASHINGTON (AP) —
The Federal Reserve indicated Wednesday that it’s nearing a long-awaited shift toward cutting interest rates, a sign that officials are confident that they’re close to fully taming inflation.
The Fed kept its key rate unchanged at about 5.4%, a 22-year high. But in a statement, it signaled a shift by dropping previous wording that had said it was still considering further hikes.
Still, the central bank cautioned that it “does not expect it will be appropriate” to cut rates “until it has gained greater confidence that inflation is moving sustainably” to its 2% target. That suggests that a rate reduction is unlikely at its next meeting in March.
The overall changes to the statement — compared with its last meeting in December — indicate that the Fed has definitively shifted toward considering rate reductions while still maintaining flexibility. In December, the officials had signaled that they expected to carry out three quarter-point rate cuts this year. Yet they have said little about when those cuts might begin, though senior officials have emphasized that the Fed would proceed cautiously.
The change in the Fed’s stance Wednesday comes as the economy is showing surprising durability after a series of 11 rate hikes helped drastically slow inflation, which hit a four-decade high 18 months ago. Over the past six months, prices have risen at an annual rate of just below 2%, consistent with the Fed’s target level, according to its preferred inflation gauge. And growth remains healthy. In the final three months of last year, the economy expanded at a 3.3% annual rate, the government said last week.
The Fed is assessing inflation and the economy at a time when the intensifying presidential campaign is pivoting in no small part on voters’ perceptions of President Joe Biden’s economic stewardship. Republicans in Congress have attacked Biden over the high inflation that gripped the nation beginning in 2021 as the economy emerged from recession. But the latest economic data — ranging from steady consumer spending to solid job growth to the slowdown in inflation — has been bolstering consumer confidence.
Most economists have said they expect the Fed to start cutting its benchmark rate in May or June. Rate cuts would eventually lead to lower borrowing costs for America’s consumers and businesses, including for mortgages, auto loans and credit cards.
A year ago, many analysts were predicting that widespread layoffs and sharply higher unemployment would be needed to cool the economy and curb inflation. Yet job growth has been steady. The unemployment rate, at 3.7%, isn’t far above a half-century low.
Labor costs are easing, too. On Wednesday, the government reported that pay and benefits for America’s workers, which accelerated in 2022, grew in the final three months of 2023 at the slowest pace in 2 1/2 years.
The Fed appears on the verge of achieving a rare “soft landing,” in which it manages to conquer high inflation without causing a recession. Should the pace of economic growth strengthen, though, it could complicate the challenge for the Fed. A much faster expansion, especially one fueled by rate cuts, could potentially re-ignite inflation.
On the other hand, any evidence that the economy is slowing appreciably would likely accelerate the Fed’s timetable for rate cuts. And indeed, some cracks in the job market have begun to emerge and, if they worsen, could spur the Fed to cut rates quickly.
For several months, for example, most of the job growth has occurred in just a few sectors — health care, government and hotels, restaurants and entertainment. Any weakening in those areas of the economy could threaten hiring and the overall expansion.
And a report Tuesday showed that the number of workers who quit in December reached its lowest level in three years. That suggested that fewer Americans are being recruited for new, higher-paying jobs or are willing to search for and take new positions. Though quits remain at a level consistent with a solid job market, they have fallen about one-third from their peak in mid-2022.
Still, the U.S. economy is outdoing its counterparts overseas. During the October-December quarter, the 20 countries that share the euro currency barely avoided a recession, posting essentially no growth. Still, as in the United States, unemployment is very low in the euro area, and inflation has slowed to a 2.9% annual rate. Though the European Central Bank could cut rates as soon as April, many economists think that might not happen until June.
