As Fed eyes interest rate cuts, the big question is: When?

January 30, 2024

Policymakers have teed up multiple cuts this year but have given no precise timeline. That could change this week.

The economy kicked off 2024 better than practically anyone expected. Now the question is: What will the Federal Reserve do about it?

After sprinting to hike interest rates and catch up to soaring prices, the central bank is entering an entirely new phase of policymaking. With inflation easing and no recession in sight, officials are eyeing multiple rate cuts this year, which would bring long-awaited relief for households and businesses feeling the strain of high borrowing costs.

What remains to be seen, though, is when the Fed changes course. As officials gather for their first meeting of the year on Tuesday and Wednesday, financialmarkets are eager for any answers.

“Inflation looks pretty damn good,” said Skanda Amarnath, executive director of Employ America, a think tank that advocates for high employment. “I’m not saying it’s perfect … but if we’re getting there sooner, it’s probably reason to move a little bit sooner. That’s contingent on the inflation data.”

Falling inflation, rising growth give U.S. the world’s best recovery

The path to cutting rates wasn’t straight or guaranteed. In 2022, the Fed moved at a breakneck pace to hoist interest rates and slow an economy that was dangerously overheating — even though many analysts thought it would takea recession to get there. Then last year, officials slowed their pace, deciding they had more leeway to see how the job market, consumer spending, inflation and overall growth responded to such aggressive policies.

What transpired surpassed even the most optimistic forecasts. Inflation came down from its 40-year peak, driven in large part by falling energy prices and supply chains clearing their pandemicbacklogs. Consumers kept spending, including on big-ticket items, vacations, concerts and holiday gifts. Businesses kept hiring, albeit at a more sustainable speed. Consumer sentiment is rebounding, too. And the economy closed out 2023 with perhaps the clearest picture yet of a “soft landing,” where inflation comes down without any major hit to workers or growth.

That picture left policymakers with enough confidence to tee up a string of rate cuts — the first since the pandemic’s early days. The Fed’s benchmark interest rate is currently at a level between 5.25 and 5.5 percent, and officials penciled in three quarter-point trims over the course of this yearat their last meeting in December.

No precise timeline was given, but market forecasters have set their eyes on the Fed’s next meeting in March as a possible kickoff. Ultimately, the economy shouldn’t be drastically affected if the Fed cuts in March as opposed to six weeks later. (Stock and bond prices might be, though.) What matters more in the long run is that officials are comfortable betting that inflation will only keep cooling until it eventually hits the Fed’s 2 percent target.

The U.S. economy boomed in 2023, thanks to consumers opening up wallets

“The data we have received the last few months is allowing the committee to consider cutting the policy rate in 2024,” Fed governor Christopher Waller said in a speech earlier this month. “However, concerns about the sustainability of these data trends requires changes in the path of policy to be carefully calibrated and not rushed.”

Major progress on inflation could be reason enough to move forward. Fresh data last week showed that the Fed’s preferred inflation gauge dropped to an annualized rate of 1.7 percent at the end of 2023, slipping below the Fed’s 2 percent goal for the first time since prices took off.

Then again, officials could decide the economy is still showing a level of strength that should push rate cuts off a few more months. The economy grew by a whopping 3.3 percent in the last three months of 2023, surpassing expectations and showing how robust consumers’ pocketbooks remain.

“Markets and the Fed are caught between strong growth and weak inflation,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in an analyst note this week. “The GDP report is genuinely new and unexpected information that the Fed will read as challenging its forecast that growth will soon slow to, or below, trend.”

Economic vibes are finally improving, consumer sentiment surges

All told, the Fed loathes surprises and will probably use this week’s meeting to cement expectations one way or the other. The first hints will come in an official statement released Wednesday afternoon, which could spell out a definitive end to rate hikes and set a timetable for upcoming cuts.

But the clearest signals will come from Fed Chair Jerome H. Powell’s news conference Wednesday at 2:30 p.m. Eastern time. There, Powell could set the stage for a cut at the next meeting, or sometime later in the spring or summer. Or he could leave both options open and signal that the central bank willbase any future decisions off data that is still to come.

This week alone, economists will get a fresh read on the labor market through data on job openings and new hiring. A key manufacturing index also gets updated Thursday. And there are two more inflation reports before the Fed’s March meeting.

Fed officials have long pinned their decisions on information that unfolds in real time. This week, it will be telling if policymakers insist they’ve seen enough improvement in the rearview mirror to ease up on the brake.

“We’re going to know a lot within the next three weeks,” Amarnath said. “From the Friday employment report, all the way through to the [producer price index] release for January — I think that’s everything.”

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