Federal Reserve officials are entering an uncertain summer. They are unsure how quickly inflation will cool, how much the economy is likely to slow, or simply how long interest rates must remain high to ensure rapid price increases are completely defeated.
What they do know is that, for now, the labor market and the broader economy are holding firm even in the face of higher borrowing costs. And given that, the Federal Reserve has a safe play: do nothing.
That’s the message central bankers are likely to send at their two-day meeting this week, which concludes Wednesday. Officials are expected to leave interest rates unchanged and avoid any firm commitment on when they will cut them.
Officials will release a new set of economic projections, which could show that central bankers now expect to make just two interest rate cuts in 2024, down from the three they last released in March. Economists believe there is a small chance that officials could even predict a single cut this year. But regardless of what they forecast, officials are likely to avoid giving a clear signal of when rate cuts will begin.
Investors do not expect a rate cut at the next Federal Reserve meeting in July, after which policymakers will not meet again until September. That gives officials several months of data and plenty of time to think about their next move. And with the economy holding up, central bankers have room to maneuver to keep rates unchanged while they wait to see if inflation slows without worrying that they are about to plunge the economy into a sharp slowdown.
“They will continue to suggest that rate cuts are coming later this year,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. He said he expected a taper in September and didn’t think the Fed would give any clues about timing this week.
“They don’t have to rush,” he explained. “Things are slowing down very gradually. “They’re not falling off a cliff.”
Federal Reserve officials have kept interest rates at 5.3 percent since July, after raising them sharply from near zero starting in March 2022. Higher Fed interest rates filter through financial markets and make it more expensive for consumers and businesses to borrow money.
Over time, higher borrowing costs are expected to slow growth by weighing on the housing market and causing people to delay big purchases like cars. They also tend to discourage companies from expanding, prompting them to hire fewer workers. And as rates weigh on demand, they should in theory make it harder for companies to raise prices as quickly, which would help slow inflation.
But today’s high rates are slow to affect the economy, and recent data has given Fed officials reason to postpone imminent rate cuts.
Officials have made clear that they could cut interest rates sooner rather than later if hiring slowed and unemployment began to soar, but so far that’s not happening. Employment growth last month was much larger than economists expected and wage growth picked up, a sign that demand for workers remained strong.
Meanwhile, inflation has been stubborn. Price increases slowed rapidly in 2023, but that progress stalled in the first months of 2024. They cooled slightly in April, but authorities have signaled they want more evidence that inflation is slowing again before it starts to fall. the cups.
May’s reading of the Consumer Price Index will be released on Wednesday morning, giving officials the latest data on inflation just before their 2pm decision on interest rates. Economists in a Bloomberg survey expect to see a slight cooling in a closely watched measure of “core” inflation, which excludes volatile food and fuel prices to give a clearer picture of how prices are evolving.
Federal Reserve officials aim for average inflation of 2 percent over time, and the central bank defines that goal using the personal consumption expenditures index, a separate inflation measure that uses some price index data. to the consumer, but is published later in the month. It also remains high, at 2.7 percent.
And in a development that may worry Federal Reserve officials, consumers have begun reporting longer-term inflation expectations. Measures released by both the University of Michigan and the Federal Reserve Bank of New York have increased in recent months.
Some Fed officials have suggested they still believe the inflationary stickiness of early 2024 is likely to fade over time.
“I view some of the recent inflation readings as primarily representing a reversal of the unusually low readings of the second half of last year, rather than a break in the general downward direction of inflation,” said John C. Williams, president of the Federal Bank. Reserve Bank of New York, during a speech on May 30.
But Williams and his colleagues have made clear that they are prepared to keep rates high for a longer period than they had previously expected until they are sure inflation is cooling again. While higher rates persist, both investors and consumers are eager to see them lower.
Today’s relatively high interest rates are having a noticeable, even painful, effect on some borrowers: Credit card rates have skyrocketed, it’s expensive to finance a car purchase, and home sales have slowed as that mortgage rates have exceeded 7 percent.
But, affecting some customers, high borrowing costs have had an uneven legacy when it comes to holding back the economy as a whole. The real estate market has slowed, but it hasn’t fallen off a cliff. Overall economic growth has cooled recently, but has generally been rebounding.
Most Federal Reserve officials have suggested they do not expect to raise interest rates further, even with that unexpected resilience. While they are not willing to completely rule out such a move, they are more inclined to simply leave borrowing costs on hold for a long time.
“It’s really about keeping policy at the current pace for longer than previously thought,” Federal Reserve Chairman Jerome H. Powell said during a speech last month.