The Federal Reserve needs more time before cutting interest rates, as hotter-than-expected inflation zaps any need for policymakers to take pressure off the economy.
That was the message from central bank chief Jerome H. Powell on Wednesday, after the Fed wrapped up its latest two-day policy meeting by leaving rates unchanged. That move had been widely expected – leaving much more anticipation around when officials will begin to lower borrowing costs from their highest levels in 23 years.
Powell gave few specifics. Over the past few months, Fed leaders have penciled in three cuts sometime this year. But that pivot keeps getting pushed back, especially after data from January, February and March kept central bankers from securing confidence that inflation is falling back to normal levels.
“We didn’t see progress in the first quarter,” Powell said at a news conference. “It’s going to take longer for us to reach that point of confidence. I don’t know how long it’ll take.”
Still, he reiterated the Fed’s commitment to getting inflation down to its 2 percent target. After annual inflation peaked at 9.1 percent in June 2022, it had come way down, to closer to 3 percent by January. But data since the start of the year has reversed some of that progress.
Fed officials aren’t at the point where another rate hike is on the table, and Powell said he still thinks rates are high enough to slow the economy meaningfully. But he said more progress isn’t guaranteed, and the path ahead is still hazy.
“Of course, we’re not satisfied with 3 percent inflation,” Powell said. “Three percent can’t be in a sentence with ‘satisfied.’ So we will return inflation to 2 percent over time.”
The Fed’s decision left the benchmark interest rate between 5.25 and 5.5 percent, where it has remained since July. Policymakers also decided that starting June 1, they will slow the pace for reducing more than $7 trillion in the Fed’s vast balance sheet. Over the past few months, markets expected such a move to trim the balance sheet was probably coming.
Financial markets are eager for any sort of timeline and have already been bracing for rates that stay higher for longer than once expected. But they weren’t shaken up by Powell’s remarks, flashing green throughout the afternoon, though some indexes closed slightly down.
Diane Swonk, chief economist at KPMG, said there isn’t time left for the Fed to cut three times this year unless a major crack in the labor market triggers more urgent action.
“The threshold to cut is clearly lower than the threshold to hike,” Swonk said. “But they have been shaken.”
As the months go by, the Fed also faces the growing reality that its moves will collide with the presidential election. Central bankers try to avoid politics, and much of their independence relies on a separation from the rest of Washington. But the next few months will be prime time for President Biden and former president Donald Trump to persuade voters to back their economic agendas.
Fed officials say their decisions will solely be made on how the data unfolds, especially on inflation. But the timing could get increasingly fraught. Few economists think the Fed will be ready to cut rates by this summer, which would punt potential cuts to policy meetings in September, November and December. (The November meeting falls during the week of the election.)
Powell said there’s no room for politics when “it’s hard enough to get the economics right.” Making decisions based on election cycles would make the Fed’s already-difficult task that much harder, Powell said, noting that this fall marks his fourth presidential election since joining the Fed during the Obama administration. (Both Trump and Biden have nominated Powell as chair since then.)
“It’s not what we’re hired to do,” Powell said. “If we start down that road … I don’t know how you stop.”
Earlier in the year, Fed officials weren’t convinced that unexpectedly high inflation data was the start of a more worrisome trend. Initially, policymakers cited seasonal glitches for January’s outsize figures. But that argument didn’t hold up after February and March followed suit. In March, the Fed’s preferred inflation gauge clocked in at 2.7 percent over the year before, up from 2.5 percent in February.
Since the economy is still behaving in weird ways, officials try not to conclude too much from a single report. But Powell said enough time had passed to convince him and his colleagues that progress wasn’t keeping up the way it did for much of 2023.
“This is a full quarter, and I think it’s appropriate to take signal now,” Powell said. “And the signal that we’re taking is that it’s likely to take longer for us to gain confidence that we are on a sustainable path.”
Zoomed out, the economic picture looks different from just a few months ago. Coming into 2024, Fed leaders rallied around the message that they’d made so much progress bringing prices back under control that they could take some pressure off the economy soon. After annual inflation peaked at 9.1 percent in June 2022, it had come way down, to closer to 3 percent by January.
A looming concern is that some of the stickiest sources of inflation are going to make the Fed’s job even harder in the months ahead, which means central bankers probably won’t see the same kind of gains as they did last year.
Part of the reason is that a lot of the progress in 2023 came from temporary factors that weren’t directly tied to Fed policy. For example, gas and energy costs were a huge reason inflation surged to 40-year highs after Russia’s invasion of Ukraine. Those prices have since fallen significantly, bringing overall inflation down, too.
Also, prices popped during the pandemic for semiconductors, bicycles and couches alike. Since then, easing supply chains have helped cool prices for all kinds of goods – or even helped them fall.
But certain inflation categories – including services like hospitality, leisure and health care – still haven’t had a major breakthrough. Housing costs have been a consistent driver of high inflation. And even though real-time measures show rent costs cooling, the official statistics aren’t budging much.
As a result, the Fed could struggle with what is dubbed the “last mile” of the inflation fight. And to make things worse, the economy is just not responding to high rates as economists expect.
High borrowing costs – especially when they rise so quickly – typically slow the economy by taming job growth and consumer spending. But the unemployment rate keeps extending its long run below 4 percent. Consumers are still spending. And even though growth slowed at the beginning of the year, the overall picture is of a strong economy that doesn’t look like it needs the Fed to take its foot off the brake.
“There’s absolutely, in my mind, no urgency to adjust the policy rate,” San Francisco Fed President Mary C. Daly said last month. “Policy is in a good place right now, and I need to be fully confident that inflation is on track to come down to 2 percent – which is our definition of price stability – before we would consider a rate cut.”
(c) 2024, The Washington Post · Rachel Siegel
