The Fed held key interest rates steady again Wednesday, as expected, and signaled that a decision that could affect everything from credit card rates to the housing market to new business creation could still be months away.
It was the fourth consecutive time the central bank has left the rate unchanged since its September 2023 announcement. In March 2022, the Fed began aggressively raising rates to stop ballooning inflation.
Following the announcement, Federal Reserve Chair Jerome Powell said that confidence is growing that inflation is coming down to meet the Fed’s target of 2%, it needs to see more data to decide to cut rates, particularly in the 12-month core inflation data.
But Powell said its confidence likely won’t be strong enough to cut rates by March as many economists believed would happen, meaning it could be May before a decision is made to cut rates.
“I think to get to that place where we feel comfortable starting the process we need some confirmation that inflation is in fact coming down, sustainably to 2%,” Powell said.
Powell added that serious changes to the labor market would affect the Fed’s decisions about when to cut rates.
“If we saw an unexpected weakening certainly in the labor market, that would weigh on cutting sooner,” he said. “And if we saw inflation being stickier or higher, or those sorts of things, we’d argue for moving later.”
The decision to hold rates steady was in line with economists’ expectations for the meeting. The issue of when to stop increasing rates and when to begin cutting rates, to avoid harming the economy and cause high unemployment, has been a matter of intense debate among economists and policymakers during this latest cycle of rate hikes. Over the past six months, core inflation or the Personal Consumption Expenditures price index is 1.9%, leading some economists to argue that it’s time to begin cutting rates.
Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, a progressive think tank, said it would make sense for the Fed to begin cutting rates soon.
“(A cut) is appropriate given how much inflation has fallen, both faster and in a more broad way than the Federal Reserve thought even six or nine months ago,” Konczal said. “The Fed is targeting a level of inflation that is just not the reality right now in the economy.”
The Federal Reserve has a pivotal decision to make in the coming months — when to start cutting interest rates after an aggressive campaign of rate hikes to combat inflation. Some economists worry that if the Fed doesn’t cut rates soon enough, now that the rise in core inflation over the past six months is in line with the Fed’s 2% inflation target, it could damage the labor market and send ripples through the economy.
There is some risk to waiting too long to cut rates, Konczal said. Although the economy is adding jobs and decent wage growth continues, he’s looking for signs of cracks underneath the surface of an otherwise stable labor market. He said that the rate for people leaving their jobs and being hired for new ones has slowed.
If the Fed waits too long to change course, he said there could be some danger of the unemployment rate ticking up too fast.
“Once those things start to fall, they fall very quickly,” he said.
Several Democratic senators have urged the Fed to begin cutting rates, arguing that it could hurt the economy not to do so as soon as possible, a reminder that the economy will be a big issue in the fall elections. Sen. Sherrod Brown (D-OH) , chair of the Senate Committee on Banking, Housing, and Urban Affairs advocated for Powell to lower rates in a letter addressed to the chairman this week.
