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Fed Likely to Preach Patience on Rates 03/18 06:17
Across the United States, many people are eagerly anticipating the Federal
Reserve's first cut to its benchmark interest rate this year: Prospective home
buyers hope for lower mortgage rates. Wall Street traders envision higher stock
prices. Consumers are looking for a break on credit card debt at record-high
interest rates.
WASHINGTON (AP) -- Across the United States, many people are eagerly
anticipating the Federal Reserve's first cut to its benchmark interest rate
this year: Prospective home buyers hope for lower mortgage rates. Wall Street
traders envision higher stock prices. Consumers are looking for a break on
credit card debt at record-high interest rates.
Not to mention President Joe Biden, whose re-election campaign would likely
benefit from an economic jolt stemming from lower borrowing rates.
Yet Chair Jerome Powell and his fellow Fed officials are expected to play it
safe when they meet his week, keeping their rate unchanged for a fifth straight
time and signaling that they still need further evidence that inflation is
returning sustainably to their 2% target.
The Fed's cautious approach illustrates what's unusual about this round of
potential rate cuts. Vincent Reinhart, chief economist at Dreyfus-Mellon and a
former Fed economist, notes that the Fed typically cuts rates quickly as the
economy deteriorates in an often-futile effort to prevent a recession.
But this time, the economy is still healthy. The Fed is considering rate
cuts only because inflation has steadily fallen from a peak of 9.1% in June
2022. As a result, it is approaching rate cuts the way it usually does rate
hikes: Slowly and methodically, while trying to divine the economy's direction
from often-conflicting data.
"The Fed is driving events, not events driving the Fed," Reinhart said.
"That's why this task is different than others."
The central bank's policymakers had said after their last meeting in January
that they needed "greater confidence" that inflation was cooling decisively
toward their 2% target. Since then, the government has issued two inflation
reports that showed the pace of price increases remaining sticky-high.
In most respects, the U.S. economy remains remarkably heathy. Employers keep
hiring, unemployment remains low, the stock market is hovering near record
highs and inflation has plummeted from its highs. Yet average prices remain
much higher than they were before the pandemic -- a source of unhappiness for
many Americans for which Republicans have sought to pin blame on Biden.
Excluding volatile food and energy costs, so-called "core" prices rose at a
monthly pace of 0.4% in both January and February, a pace far higher than is
consistent with the Fed's inflation target. Compared with a year earlier, core
prices rose 3.8% in February. Core prices are considered a good signal of where
inflation is likely headed.
But in February, a measure of housing costs slowed, a notable trend because
housing is among the "stickiest" price categories that the government tracks.
At the same time, more volatile categories, like clothing, used cars and
airline tickets, drove up prices in February, and they may well reverse course
in coming months.
"Nothing about those two data prints made you feel substantially better
about" inflation reaching the Fed's target soon, said Seth Carpenter, chief
global economist at Morgan Stanley and also a former Fed economist. "But it's
not at all enough to make you change your view on the fundamental direction of
travel" for inflation.
Indeed, several Fed officials have said in recent speeches that they expect
inflation to keep declining this year, though likely more slowly than in 2023.
The Fed has also built in some expectation that price increases would ease
only gradually this year. In December, it projected that core inflation would
reach 2.4% by the end of 2024. That's not far from its current 2.8%, according
to the Fed's preferred measure.
On Wednesday, the Fed's policymakers will update their quarterly economic
projections, which are expected to repeat their December forecast for three
rate cuts by the end of 2024. Still, it would take only two of the 19 Fed
officials to change their forecast to one fewer rate cut for the central bank's
overall projection to downshift to just two rate cuts for 2024. Some economists
expect that to happen, given that inflation has remained persistent at the
start of this year.
The Fed's benchmark rate stands at about 5.4%, the highest level in 23
years, after a series of 11 rate hikes that were intended to curb the worst
inflation in four decades but have also made borrowing much more expensive for
consumers and businesses.
Like the Fed, other major central banks are keeping rates high to ensure
that they have a firm handle on consumer price spikes. In Europe, pressure is
building to lower borrowing costs as inflation drops and economic growth has
stalled, unlike in the United States. The European Central Bank's leader hinted
this month that a possible rate cut wouldn't come until June, while the Bank of
England isn't expected to open the door to any imminent cut at its meeting
Thursday.
Most economists expect the Fed to implement its first rate cut at its June
meeting, which would mean that in May, the Fed would signal such a coming move.
By June, the policymakers will have in hand three more inflation readings and
three more jobs reports.
Sarah House, senior economist at Wells Fargo, said that timetable leaves
plenty of time for inflation to resume its downward path. A rate reduction
would likely lead, over time, to lower rates for mortgages, auto loans, credit
cards and many business loans.
"They certainly need to see something better than the past couple of months,
but they can get it," she said.
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