Three interest rate cuts still in sight

Fed predicts fewer in 2025 and slightly raised the inflation forecasts for this year.

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington on Wednesday. SUSAN WALSH — THE ASSOCIATED PRESS

By Christopher Rugaber | The Associated Press

Federal Reserve officials signaled Wednesday that they still expect to cut their key interest rate three times in 2024 despite signs that inflation was surprisingly high at the start of the year. Yet they foresee fewer rate cuts in 2025, and they slightly raised their inflation forecasts.

After ending their latest meeting, the officials kept their benchmark rate unchanged for a fifth straight time.

In new quarterly projections they issued, the policymakers forecast that stronger growth and inflation above their 2% target level would persist into next year. As a result, they suggested that interest rates would have to stay slightly higher for longer.

Speaking at a news conference, Chair Jerome Powell noted that inflation has cooled considerably from its peak. But, he added, “inflation is still too high, ongoing progress in bringing it down is not assured and the path forward is uncertain.”

“The risks are really two-sided here,” Powell said. “We’re in a situation where if we ease too much or too soon, we could see inflation come back. And if we ease too late, we could see unnecessary harm to employment.”

Rate cuts would, over time, lead to lower costs for home and auto loans, credit card borrowing and business loans. They might also aid President Joe Biden’s re-election bid, which is facing widespread public unhappiness over higher prices and could benefit from an economic jolt stemming from lower borrowing rates.

On Wall Street, traders sent stock prices surging Wednesday, evidently out of relief that the Fed kept its projection of three rate cuts this year. Traders had feared that the Fed might downgrade the number of expected rate cuts for 2024. Investors may also have been pleased that at his news conference, Powell didn’t sound alarmed by signs of higher-than- expected inflation.

One recent government report showed that consumer prices jumped from January to February by much more than is consistent with the Fed’s target. Another showed that wholesale inflation came in surprisingly high — a possible sign of inflation pressures in the pipeline that could cause consumer price increases to remain elevated.

Those two reports, Powell said, “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road towards 2%.”

For 2025, though, the policymakers now foresee only three rate cuts, down from four in their December projections. One reason may be that they expect “core” inflation, which excludes volatile food and energy costs, to still be 2.6% by the end of 2024, up from their previous projection of 2.4%. In January, core inflation was 2.8%, according to the Fed’s preferred measure.

As a whole, Wednesday’s forecasts suggest that the policymakers expect an unusual combination: A healthy job market and economy in tandem with inflation that continues to cool — just more gradually than they had predicted three months ago.

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