WASHINGTON (AP) – After Federal Reserve officials meet this week, a statement they will release could suggest they have seen meaningful progress in inflation this year – a prelude to eventual interest rate cuts.
It’s hard to say, though, because the officials themselves may not know for sure until they begin their meeting. That’s because the government’s latest picture of US inflation will be released on Wednesday morning, just before the Fed begins its second day of policy discussions.
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A key issue is a sentence the Fed added to its statement after its last meeting on May 1: It said “there has been a lack of further progress” in returning inflation to the central bank’s 2 percent target.
Inflation had reached an uncomfortably high level in the first three months of this year, dimming hopes that it would continue to cool steadily, as it did in the second half of last year.
However, in April, consumer inflation started to slow again, if only slightly. And if the May inflation report released Wednesday shows further signs of improvement, it’s possible the Fed could drop that sentence from its statement. It would be an encouraging sign that policymakers could cut their base rate within a few months. Lowering rates would eventually lead to lower costs for mortgages, car loans and other forms of consumer and business borrowing.
But regardless of whether the penalty is lifted or reversed, most economists think no rate cut is likely before September. Chairman Jerome Powell is likely to hint at a news conference on Wednesday that policymakers will need to see several more months of low inflation readings before considering cutting their key rate.
A Fed rate cut could give the economy a modest boost that would be welcomed by President Joe Biden’s re-election campaign, which is trying to counter many voters’ unhappiness with rising inflation over the past few years. Although consumer inflation has slowed dramatically since peaking at 9.1 percent in mid-2022, it was still 3.4 percent in April, well above the Fed’s target.
The Fed would cut rates more quickly if growth stalled and companies laid off many workers. But on Friday, the government reported a strong job gain in May, with employers in a range of industries adding jobs. The report prompted Wall Street traders to cut their forecast for the Fed’s rate cut to just one this year, from two.
The Fed is set on Wednesday to keep its key rate unchanged at around 5.3 percent, its highest level in 23 years, where it has remained since July. Policymakers will also issue updated economic forecasts, which are expected to show they foresee one or two rate cuts by the end of the year, down from a forecast of three in March.
At his press conference, Powell is likely to reiterate that Fed officials need more confidence that inflation is returning to 2 percent before considering cutting rates, and that this will likely take additional time.
“The Fed’s narrative will be very similar to what we’ve been hearing: ‘We’ve made progress reducing inflation; we’re in no rush to cut rates,'” said Nathan Sheets, a former senior Fed economist who is chief global economist at Citi.
READ MORE: Inflationary pressures lingering from the pandemic could prevent the Fed from cutting interest rates
Another issue Powell could address is whether the economy has begun to weaken. Growth slowed sharply in the first three months of the year, to an annual rate of just 1.3 percent, from 3.4 percent in the final quarter of last year.
The number of job openings fell in April to the lowest level in three years, although the number remains high by historical standards. And consumers actually cut their spending in April after adjusting for inflation, a sign that high prices and high interest rates are putting pressure on Americans’ finances.
Although solid job growth in May helped ease some of those concerns, the unemployment rate rose for the second month in a row to 4 percent.
Such early signs of weakness could help clarify an ongoing debate among Fed officials: How much are higher rates hurting the economy? Policymakers raised borrowing costs over the past two years with the goal of slowing spending enough to tame inflation.
Given last year’s strong growth and substantial job gains earlier this year, some officials had come to question whether their rates were high enough. Minutes from the Fed’s most recent meeting suggested that some officials had even expressed openness to additional rate hikes.
A cooling economy “would reinforce their story that (interest rate) policy is restrictive,” said Donald Kohn, a former vice chairman of the Fed’s Board of Governors who is a senior fellow at the Brookings Institution. “That’s what people suspected – myself included – at a time when everything was coming so hard.”
Last month, John Williams, president of the Fed’s New York branch, said there was “ample evidence” that higher rates were holding back the economy. Home sales have fallen. And spending on appliances, furniture and other high-priced goods has slowed.
The Fed’s cautious approach to cutting rates stands in contrast to some of its counterparts overseas. On Thursday, the European Central Bank announced its first rate cut in five years, citing the progress it has made in slowing price growth. Inflation has fallen from a peak of 10.6 percent to 2.6 percent in the 20 countries that use the euro currency.
The Bank of Canada also cut rates last week. The Bank of England will meet on Thursday, although it is not clear whether it will cut. The Bank of Japan is the only major central bank to raise interest rates in response to rising prices after decades of deflation.
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