US Fed rate decision could hold clues on timing of future cuts

WASHINGTON: The US Federal Reserve is almost certain to hold its key lending rate steady for a fourth consecutive meeting Wednesday, as inflation continues to inch closer towards its long-term target of two percent.

But analysts and traders will be looking beyond the headline figure — which is likely to remain unchanged — for any indication of how soon the US central bank could start cutting rates.

Following a post-pandemic surge in inflation, the Fed rapidly hiked interest rates in a bid to bring the price-increase measurement back down towards its goal of two percent — with surprising success.

In recent months, the Fed’s target inflation rate, which strips out volatile food and energy prices, recently fell below an annual 3.0 percent, while economic growth remained robust at 2.5 percent in 2023 and unemployment stayed close to historic lows.

“The data to date has been stunningly good,” KPMG chief economist Diane Swonk wrote in a blog post this week. But despite the strong numbers, the Fed’s work remains unfinished. That is why policymakers on the rate-setting Federal Open Market Committee (FOMC) are widely expected to keep the central bank’s key lending rate unchanged Wednesday at a 23-year high of between 5.25 and 5.50 percentage points. This week’s meeting should serve “to confirm that the FOMC has left behind its tightening bias and has more intensely begun the discussion around rate cuts,” Deutsche Bank economists wrote in a note to clients.

The hints could either come in the rate decision itself, or in Fed Chair Jerome Powell’s press conference later in the day. But Powell must also “be cautious to curb his enthusiasm at the press conference so that he does not inadvertently trigger a major financial market rally,” as happened after the last rate decision in December.

In its December meeting, the Fed raised its economic outlook for the year ahead, and signaled it expects as many as three quarter-percentage-point rate cuts in 2024, sparking a wave of optimism in financial markets that the central bank could cut rates as soon as March. When the Fed lowers interest rates, US consumers usually get cheaper access to credit, meaning the cost of everything from car loans to mortgages becomes cheaper, while company valuations see a boost.