The US Federal Reserve building is pictured in Washington. Reuters
In the upcoming months, the US Federal Reserve is anticipated to begin reducing interest rates as inflation approaches its long-term objective of two percent.
The timing of the first of such cuts, however, is less certain.
At its next rate decision on Wednesday, the US central bank is almost expected to declare that it is maintaining its benchmark lending rate unchanged, but experts believe it may also provide some more indications that cuts are on the way.
Policymakers said they expect up to three quarter percentage-point rate decreases this year in economic estimates released along with the most recent Fed decision, though they did not specify when they may start.
Fed Chair Jerome Powell stated during a news conference following the rate decision announcement that officials had even spoken about when it would be “appropriate” for the Fed to start lowering interest rates. However, Powell did not provide any further information.
There are now differences between traders and experts who anticipate the Fed’s rate-setting committee will begin lowering interest rates in March and others who think it would be wiser to wait until later in the year.
“If we are right on our outlook for a rate cut in March, it is likely because a majority of participants focus on more aggregated measures of inflation than specific components,” Bank of America economists wrote in a recent investor note.
Meanwhile, Wells Fargo chief economist Jay Bryson told AFP Friday that recent inflation data is keeping hopes of a March cut “live,” but added: “I still think that’s a little bit premature.”
“There may be some members who are willing to contemplate rate cuts as soon as March, I just don’t think you can get a supermajority to agree to that,” he said in an interview.
Strong data
Recent economic data showed that growth in the United States reached 2.5 percent in the year to December, underscoring the enduring, unexpected strength of the world’s biggest economy.
In more good news, the Fed’s favored measure of inflation has dipped below three percent, and the unemployment rate has hugged close to record lows — raising expectations the United States can bring down inflation without causing a recession.
The Fed has a mandate to act independently of the US Congress, but its upcoming decisions will nevertheless be closely parsed by politicians on both sides of the aisle.
That’s because 2024 is a presidential election year, with a likely rematch in the cards between President Joe Biden and his predecessor Donald Trump.
Fed interest rate cuts can help reduce the cost of consumer loans, making everything from cars to mortgages more affordable for millions of households.
The Biden administration is hoping that growing consumer confidence in the economy will translate into more votes for Democrats, while Republicans are betting that unhappiness over historical inflation could cause voters to turn to them instead.
How many cuts?
Fed officials have used recent public remarks to indicate support for a more cautious approach to cutting interest rates than the financial markets were predicting immediately after December’s rate decision.
At the time, traders were pricing in six 25 basis point interest rate cuts for 2024, with the first of them arriving in March.
San Francisco Fed president Mary Daly, who sits on the Fed’s rate-setting committee, said earlier this month that she thought it was “premature” to think rate cuts were just around the corner.
“We are fully committed to restoring price stability and doing it of course as gently as we can, but we have a lot of work left to do,” Daly told Fox Business.
“We are not there yet, and it’s far too early to declare victory,” she added.
“If we continue to see a further accumulation of downside surprises in the data, it’s possible for me to get comfortable enough to advocate normalization sooner than the third quarter,” Atlanta Fed president Raphael Bostic said earlier this month.
“But the evidence would need to be convincing,” added Bostic, who is also a voting member of the Fed’s rate-setting committee this year.
Futures traders now expect at least five rate cuts this year, assigning a probability of almost 90 percent to a first cut by the May interest rate decision, according to an AFP analysis of CME Group data.