Officials likely to play safe on cuts
WASHINGTON — Across the United States, many people are eagerly anticipating the Federal Reserve’s first cut to its benchmark interest rate this year: Prospective homebuyers hope for lower mortgage rates. Wall Street traders envision higher stock prices. Consumers are looking for a break on credit card debt at record-high interest rates.
Not to mention President Joe Biden, whose re-election campaign would likely benefit from an economic jolt stemming from lower
borrowing rates.
Yet Chair Jerome Powell and his fellow Fed officials are expected to play it safe when they meet this week, keeping their rate unchanged for a fifth straight time and signaling they still need further evidence inflation is returning sustainably to their 2% target.
The Fed’s cautious approach illustrates what’s unusual about this round of potential rate cuts. Vincent Reinhart, chief economist at Dreyfus-Mellon and a former Fed economist, notes the Fed typically cuts rates quickly as the economy deteriorates in an often-futile effort to prevent a recession.
But this time, the economy is still healthy. The Fed is considering rate cuts only because inflation has steadily fallen from a peak of 9.1% in June 2022. As a result, it is approaching rate cuts the way it usually does rate hikes: Slowly and methodically, while trying to divine the economy’s direction from often-conflicting data.
“The Fed is driving events, not events driving the Fed,” Reinhart said. “That’s why this task is different than others.”
The central bank’s policymakers had said after their last meeting in January they needed “greater confidence” inflation was cooling decisively toward their 2% target. Since then, the government has issued two inflation reports that showed the pace of price increases remaining sticky-high.
In most respects, the U.S. economy remains remarkably heathy. Employers keep hiring, unemployment remains low, the stock market is hovering near record highs and inflation has plummeted from its highs. Yet average prices remain much higher than they were before the pandemic — a source of unhappiness for many Americans, for which Republicans have sought to pin blame on Biden.
Excluding volatile food and energy costs, so-called “core” prices rose at a monthly pace of 0.4% in both January and February, a pace far higher than is consistent with the Fed’s inflation target. Compared with a year earlier, core prices rose 3.8% in February. Core prices are considered a good signal of where inflation is likely headed.
But in February, a measure of housing costs slowed, a notable trend because housing is among the “stickiest” price categories the government tracks. At the same time, more volatile categories like clothing, used cars and airline tickets drove up prices in February, and they may well reverse course in coming months.
“Nothing about those two data prints made you feel substantially better about” inflation reaching the Fed’s target soon, said Seth Carpenter, chief global economist at Morgan Stanley and also a former Fed economist. “But it’s not at all enough to make you change your view on the fundamental direction of travel” for inflation.