Speculation about eventual rate cuts is rising

Fed is set to leave interest rates unchanged

WASHINGTON — With inflation edging closer to the Federal Reserve’s 2% target, its policymakers are facing — and in some cases fueling — hopes that they will make a decisive shift in policy and cut interest rates next year, possibly as soon as spring.

Such a move would reduce borrowing costs across the economy, making mortgages, auto loans and business borrowing less expensive. Stock prices could rise, too, though share prices have already risen in expectation of cuts, potentially limiting any further rise.

Fed Chair Jerome Powell, though, has recently downplayed the idea that rate reductions are nearing. With the central bank poised to keep its key short-term rate unchanged when it meets this week, Powell hasn’t yet signaled that the Fed is conclusively done with its hikes. Speaking recently at

Spelman College in Atlanta, the Fed chair cautioned that “it would be premature to conclude with confidence” that the Fed has raised its benchmark rate high enough to fully defeat inflation.

But the Fed’s two-day meeting that ends Wednesday will mark the third straight time that its officials have kept their key rate unchanged, lending weight to the widespread assumption that rate hikes are over.

The economy, after all, is headed in the direction the Fed wants: On Tuesday, when the government releases the November inflation report, it’s expected to show that annual consumer price increases slowed to 3.1%, according to a survey of economists by FactSet, down sharply from a peak of 9.1% in June 2022.

And job openings have declined, which means companies are less desperate to hire and feel less pressure to sharply raise wages, which can accelerate inflation. Consumers are still spending, though more modestly, and the economy is still expanding.

Such trends suggest progress toward what economists call a “soft landing,” in which inflation reaches the Fed’s 2% target without causing a recession. Analysts are increasingly encouraged by what they say is an unusually smooth adjustment to lower inflation.

That sunnier outlook represents a shift in thinking. Last year, many economists had insisted that defeating inflation would require a sharp recession and high unemployment. In fact, falling inflation, without an accompanying recession or job losses, is “historically unprecedented,” economists at Goldman Sachs wrote in a recent note.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview with The Associated Press last month that the United States is on track this year for the fastest annual drop in inflation on record. If so, Goolsbee said, the result could be a “bigger soft landing than conventional wisdom believes has ever been possible.”

That said, a soft landing is hardly a sure thing. If, for example, the Fed miscalculated and kept interest rates too high for too long, it could eventually derail the economy and tip it into a recession.

“There’s more risk of a recession than a re-acceleration in inflation at these interest rates,” said Julia Coronado, president of MarcoPolicy Perspectives, an economic research firm. “So ultimately, the next move is likely to be a cut because of that.”

The timing of any rate cuts will depend on the health of the economy. A recession — or the threat of one — would likely prompt more, and earlier, interest rate reductions by the Fed.

Yet Friday’s jobs report for November showed that businesses are still adding jobs at a healthy pace, and the unemployment rate dropped to a low 3.7% from 3.9%. Such figures suggested that the most-anticipated recession in decades is not imminent. Investors have since pushed back their expectations for the first Fed rate cut from March to May.