Inflation is nearly back to 2 per cent

So why isn’t the Federal Reserve ready to cut rates?

WASHINGTON — 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 per cent — 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 the Fed’s key rate 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 spike again. And some are worried that if they cut rates now and inflation re-accelerates, then the Fed could be forced into an about-face and have to raise rates again.

“History tells many stories of inflation head-fakes,” said Tom Barkin, president of the Federal Reserve Bank of Richmond, in a speech Thursday.

Inflation had seemed defeated in 1986, Barkin noted, when Paul Volcker was Fed chair.

“The Fed reduced rates, but inflation then escalated again the following year, causing the Fed to reverse course,” he said.

“I would love to avoid that rollercoaster if we can,” said, Barkin, who is among 12 Fed officials who vote on interest rate policy this year.

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. Last month, for example, America’s employers delivered a burst of hiring, and the unemployment rate stayed at 3.7 per cent.

“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 higher borrowing rates are only barely restraining the economy, some officials may conclude that high rates should stay in place longer or that few rate cuts will be needed.

“I don’t feel there’s a sense of urgency here,” Loretta Mester, president of the Cleveland Federal Reserve, told reporters on Tuesday.

“I think later this year, if things evolve as anticipated, we would be able to start moving the rate down.”