Fed keeps rates steady, hints at future cuts
Federal Reserve officials left interest rates unchanged Wednesday and continued to forecast that borrowing costs will come down somewhat by the end of the year as inflation eases.
Officials held interest rates steady at about 5.3 percent, where they have been set since July, when they released their policy decision and a fresh set of quarterly economic estimates, the first since December.
Policy makers projected that borrowing costs will end 2024 at 4.6 percent, which suggests that they still expect to make three quarter-point rate cuts this year. At the same time, officials anticipated that rates would stay slightly higher into 2025 and 2026 as growth and the labor market remain strong. The new forecasts suggested that they will make one fewer rate cut next year than they had previously predicted.
Fed officials have signaled in recent months that they expect to lower interest rates this year because inflation has been slowing notably, which means that the Fed has less of a need to aggressively hit the brakes on the economy. High interest rates weigh on demand by making it more expensive to borrow to buy a house or expand a business, setting off a chain reaction that trickles through the economy and cools the job market.
As policy makers try to decide when and how much to dial back their high rates, they are trying to balance two key risks. They want to keep rates high enough long enough to ensure that inflation is fully stamped out, on one hand, but they also want to avoid keeping rates elevated for too long, which could inflict unnecessary damage on the economy. “It will likely be appropriate to begin dialing back” policy restraint at some point this year, Jerome Powell, the Fed chair, said during his news conference following the Fed’s release.
When exactly those rates cuts could start is still unclear. The ratesetting Federal Open Market Committee “does not expect it will be appropriate to reduce” rates until “it has gained greater confidence that inflation is moving sustainably toward 2 percent,” officials reiterated in their post-meeting statement.
Fed officials lifted rates rapidly between March 2022 and mid2023. But they stopped the increases as inflation began to come down sharply toward the end of last year.
Price increases are now much more moderate than they were a few years ago. The consumer price index measure stood at 3.2 percent in February, down sharply from a 9.1 percent peak in 2022. The Fed’s preferred inflation measure, the personal consumption expenditures index, comes out at more of a delay, but it is also down considerably. It stood at 2.8 percent in January after stripping out food and fuel costs for a sense of the underlying “core” price trend.
“Inflation has eased substantially even as the labor market remains strong,” Powell said. “That is very good news.”
Despite the progress, inflation is lingering above the Fed’s 2 percent goal, and it has recently stalled. While officials still hope that price increases will continue to fade this year, they are keeping an eye on incoming data for any indication that they might be wrong.
As they do so, officials are closely watching conditions in the broader economy, which has retained surprising momentum at a time when interest rates are hovering near a two-decade high. Fed officials forecast that growth will be stronger in 2024, 2025, and 2026 than they had previously expected, based on their fresh estimates. They also think that the unemployment rate will remain slightly lower this year than they had earlier anticipated.
“Recent indicators suggest that economic activity has been expanding at a solid pace,” Fed officials said in their post-meeting statement. “Job gains have remained strong, and the unemployment rate has remained low.”
As the economy remains robust, Fed policy makers made a rare tweak to their “longer run” interest rate estimate, lifting it to 2.6 percent from 2.5 percent previously. While that is a tiny shift, the longrun interest rate projection is a rough estimate of how high officials think interest rates need to be in order to weigh down the economy. The fact that it crept higher suggests that they think it needs to be more elevated than in the past in order to tap the brakes on economic growth.
The Fed also discussed its plans for its balance sheet of bond holdings at this meeting, and although Powell said that officials did not make any decisions, he signaled that they could soon begin to slow the ongoing shrinking of their security holdings.
The Fed’s balance sheet grew during the pandemic as the central bank purchased bonds in huge sums, first to calm markets and later to stimulate the economy. Officials want to shrink those holdings back to more normal levels to avoid playing such a big role in financial markets. At the same time, they want to avoid overdoing shrinking their bond holdings so much that they risk market ruptures.