Federal Reserve officials are expected to keep interest rates unchanged on Wednesday, but investors and economists will be watching closely for clues as to when policymakers might begin cutting borrowing costs.
Central bankers have kept interest rates at 5.3 percent since July after a rapid series of hikes in early 2022. Going into 2024, policymakers expected to cut interest rates several times, but inflation proved surprisingly stubborn, delaying those cuts.
At the conclusion of their two-day meeting on Wednesday, Fed officials will release economic forecasts for the first time since March and update how many interest rate cuts they expect this year. Economists say policymakers could predict two cuts by the end of the year, compared to three previously. There’s even a slim chance officials are predicting just a rate cut.
Regardless, central bankers are likely to remain cautious on one important question: When will they even start cutting borrowing costs? Policymakers are not expected to cut rates in July, meaning they will have several months’ worth of data by their next meeting on September 17 and 18. Given that, officials will likely try to keep their options open.
“As simple as that, it will be a message of patience,” said Yelena Shulyatyeva, senior U.S. economist at BNP Paribas. “We want to make sure inflation goes down and we’re happy to wait for that to happen.”
That won’t stop investors from watching a post-meeting news conference with Fed Chairman Jerome H. Powell for clues on when interest rates might finally begin to cut – providing relief to would-be borrowers and financial markets further boosted.
Here’s what to watch at this week’s Fed meeting.
The “points” will be in focus.
The Fed issues a statement after each of its eight meetings each year, but it only provides new forecasts for inflation, unemployment, growth and interest rates every three months. The latest update to this summary of economic forecasts is scheduled to be released on Wednesday at 2 p.m.
Markets tend to focus primarily on interest rate forecasts, often referred to as “dots.” The name is derived from the representation: the forecasts of political decision-makers are shown individually as anonymous circles in a graphic.
The points will be in even more focus than usual this month as they will almost certainly move from the last forecast. If just one official reduces his forecast, the middle point could suggest there will only be two rate cuts by year’s end, down from the previous three.
There is a lack of urgency.
As signs mount that interest rates may not fall as much or as quickly as previously expected, a second big question emerges. When exactly do the cuts start?
In all likelihood not immediately. Given that employers are hiring, the economy is growing at a reasonable pace and there is much uncertainty about how much and how quickly inflation will cool, officials have suggested that the bigger mistake would be to increase borrowing costs to cut early and then have to reverse course because inflation got stuck.
Many economists believe that today’s conditions – albeit sluggish inflation, coupled with a solid economy – will allow an initial rate cut in September. But both forecasters and Wall Street investors also see a significant chance that the Fed will not begin cutting borrowing costs until December.
Inflation is a wild card.
The great uncertainty underlying this meeting concerns precisely what will happen to inflation.
On the one hand, price increases have slowed sharply since their peak in 2022. The consumer price index peaked at about 9.1 percent this year but is now at about 3.4 percent. On the other hand, progress has stalled in recent months, and inflation remains above the Fed’s 2 percent target (which it officially defines using a separate but related measure of inflation).
New CPI inflation data, due to be released at 8:30 a.m. on Wednesday, will give policymakers an update on price trends.
Officials will have the opportunity to update their economic forecasts after release – they can be revised “by the morning of the second day of the meeting,” according to Fed rules. While the guidelines do not specify a specific deadline, a Fed spokesman noted that the Fed chair had previously said that forecasts could be updated by mid-morning on the final day of the meeting.
Additionally, Mr. Powell’s tone could change somewhat depending on what the latest inflation data shows.
Politics provides the background.
For households and the White House, the Fed’s signals at this meeting could be important.
High interest rates are not a popular policy among American voters: They make borrowing to buy a home or a car more expensive and can be a crushing expense for people with credit card balances. They are also working to slow the economy and weaken the labor market. Even if the goal is to reduce inflation, the path to get there can be difficult.
Given this, incumbent politicians generally do not like high interest rates. When Donald J. Trump was president, he railed against them, and while President Biden avoided openly criticizing them out of respect for the Fed’s independence, other Democrats were not so reticent. After the European Central Bank cut interest rates last week, Sen. Elizabeth Warren of Massachusetts and other Democrats sent a letter to the Fed chairman urging him to follow suit.
“The Fed’s decision to keep interest rates high continues to widen the interest rate gap between Europe and the US, as lower rates could push the dollar higher and tighten financial conditions,” the lawmakers wrote.
The Fed says it doesn’t take politics into account when setting interest rates, a line officials are likely to maintain this week.
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2024-06-12 09:03:57
www.nytimes.com
