The Fed holds rates steady, sees only one rate cut in 2024 as inflation cools slowly
The Federal Reserve held interest rates steady Wednesday, while signaling it expects to be able to cut rates only once this year.
The decision and the rate cut projections came hours after the Labor Department reported a modest — but welcome — easing in the inflation rate last month.
The Fed has kept its benchmark interest rate at the highest level in over two decades since last July. That's making it more expensive to get a car loan, finance a business or carry a balance on your credit card.
Fed policymakers still expect to cut rates later this year. But forecasts released at the end of their two-day meeting show on average, policymakers anticipate just one quarter-point rate cut by year's end — down from the three rate cuts they were forecasting in March.
The Fed has been prevented from cutting rates more aggressively because inflation has proven to be more stubborn than expected. Policymakers want more evidence that inflation is falling back towards their target of 2% before they start lowering rates.
The latest cost-of-living report, also released Wednesday, offers some encouraging signs that inflation is moving in that direction.
Consumer prices in May were 3.3% higher than a year ago — a smaller annual increase than the previous month. The consumer price index was flat between April and May, as falling gasoline prices helped to offset rising rents and restaurant prices.
The economy is still doing well
While high borrowing costs have weighed on parts of the economy — especially the housing market — they haven't depressed hiring so far. Employers added a robust 272,000 jobs in May and average wages were 4.1% higher than a year earlier.
Wages have been climbing faster than prices for over a year now, giving workers a real boost in their buying power.
But rapid wage gains can also put upward pressure on prices, making it more difficult for the Fed to control inflation.
Transcript
MARY LOUISE KELLY, HOST:
We got some good news on inflation today. Prices rose more slowly in May than they did the month before and more slowly than most forecasters had been expecting. Well, despite that welcome news, the Federal Reserve says it's going to take its time cutting interest rates. NPR's Scott Horsley has just raced back from the Fed to bring us the latest. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Mary Louise.
KELLY: OK, there have been months this year when inflation came in way hotter than we were expecting. Today's numbers - totally different story. What do they tell us?
HORSLEY: Yeah. Inflation cooled last month. Consumer prices were up 3.3% in May from a year ago. That's a lower annual increase than in April, and it's way down from the nine-plus percent inflation rate we had a couple of years ago.
What's more, the cost of living barely budged between April and May. Rent and restaurant prices were up during the month, but that was partially offset by falling gasoline prices. Air fares and new car prices were also down last month.
Federal Reserve Chairman Jerome Powell welcomed this news, but after some of those unpleasant surprises earlier in the year, he's not yet ready to declare victory.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: Today was certainly a better inflation report than almost anybody expected, and we'll just have to see what incoming data flow brings.
HORSLEY: For now, Powell and his colleagues at the Fed are keeping interest rates steady at their highest level in more than two decades.
KELLY: Well, and it sounds like those high interest rates might be with us for a while.
HORSLEY: They could be. Yeah. Fed policymakers signaled today they expect to be less aggressive about cutting interest rates than they had anticipated earlier this year. Back in March, policymakers thought on average they'd be able to cut rates three times by the end of the year. Today, they dialed that back to just a single rate cut.
Now, ordinarily, you'd think that might spook the stock market, which likes lower interest rates, but both the S&P 500 Index and the NASDAQ hit record highs today, so investors seem to be discounting that Fed forecast.
And I should say, it's not really a forecast. It's just educated guesses of what Fed officials think rates might go - where they might go from here. It's not a road map. It's not a plan. Powell says, it's just going to depend on what happens with inflation and the job market in the coming months, and he stressed knowing when to cut rates is a balancing act.
(SOUNDBITE OF ARCHIVED RECORDING)
POWELL: We understand that if we wait too long, that could come at the cost of economic activity, of employment, of the expansion. We understand that if we move too quickly, we could end up undoing a lot of the good that we've done, and it could be very disruptive.
HORSLEY: So as long as interest rates stay high, that means it's going to stay expensive to borrow money for a car or a business or just to carry a balance on your credit card.
KELLY: Stay with that last point because I have been reading credit card balances have been going up. Why? How big a worry is that?
HORSLEY: Yeah, the Fed chairman was asked about that today. On average, people's wages have been going up faster than prices, but not everyone's wages have kept up with expenses, and so some have relied on credit cards to close that gap. With today's high interest rates, that's very expensive borrowing. At some point, consumers may have to dial back. Powell says, so far, though, we're not really seeing that.
(SOUNDBITE OF ARCHIVED RECORDING)
POWELL: Consumer spending is still growing. It's not growing at the pace it was growing at a year or so ago, but it's still growing solidly. The best thing we can do is to foster a very strong jobs economy, which we think we have done. And, you know, once we get inflation under control, rates can come down.
HORSLEY: That strong jobs economy also helps to support spending. Employers added 272,000 jobs last month. Wages in May were up more than 4% from a year ago, so that's more than enough to outpace inflation. Powell says the job market is still quite strong, but there's a better balance now between the number of jobs and the number of workers. So the market's no longer in danger of overheating and fueling further inflation, as the Fed had worried a couple of years ago.
KELLY: NPR's Scott Horsley. Great, as always, to chat with you.
HORSLEY: Likewise. Thanks to be here. Transcript provided by NPR, Copyright NPR.
300x250 Ad
300x250 Ad