Fed leaves rate unchanged, signals cuts not imminent
WASHINGTON — The Federal Reserve indicated Wednesday that it’s nearing a long-awaited shift toward cutting interest rates, a sign that its officials have grown confident that they’re close to fully taming inflation. But the Fed also signaled that the first rate cut is likely months away.
The central bank kept its key rate unchanged at about 5.4%, a 22-year high. In a statement, it marked a policy shift by dropping previous wording that had said it was still considering further rate hikes.
Still, the Fed 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 — show that the Fed has moved 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 in 2024. Yet they have said little about when those cuts might begin. Senior officials have stressed that the Fed will 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 had 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.
Speaking at a news conference, Chair Jerome Powell said the Fed welcomes signs of economic strength but said it is seeking further signs that inflation is slowing consistently.
“We want to see strong growth and a strong labor market,” Powell said. “We’re looking for inflation to come down, as it has been coming down for the last six months.”
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.