U.S. central bankers are not likely to decrease borrowing costs this week, but their fresh economic estimates may indicate fewer interest rate cuts and a later policy easing start than predicted.
If interest rates stay high for a long time, it could hurt American households and businesses, especially in a presidential election year when President Joe Biden and his Republican opponent, Donald Trump, are already discussing the economy.
Markets still expect the Federal Reserve to lower its policy rate, which has been between 5.25% and 5.50% since July, at its June 11-12 meeting. With inflation remaining over the Fed's 2% target and stronger-than-expected in the first two months of this year, traders are pricing a 40% chance of the first rate cut at the July 30-31 meeting.
Financial market bets suggest an end-of-2025 policy rate of 3.75%–4.00%, a quarter percentage point lower than Fed policymakers predicted in December. "Two months (of higher inflation readings) is too soon to declare all is lost, but it raises the risk that you have a little bit more of an inflation problem, and in that case it makes sense to be cautious," said Nomura Securities senior U.S. economist Jeremy Schwartz. "You have to consider the possibility that it will take a longer period of restrictive policy."
Nomura is one of a rising number of forecasts who expect Fed policymakers this week to decrease their estimated three quarter-percentage-point rate cuts this year to two.
Last week's announcement that consumer price inflation rose to 3.2% in February from 3.1% won't reassure Fed policymakers that inflation is moving sustainably toward their 2% goal, the bar they established in January for dropping rates."They were hoping for better, clearly... but I'm not sure they are completely surprised by this," said Nationwide chief economist Kathy Bostjancic, who believes Fed members will adhere to December's quarterly estimates.
Despite cooling, the economy is solid. In February, the unemployment rate was 3.9%, up two-tenths of a percentage point from January but below what Fed policymakers consider sustainable. Business added 275,000 positions last month.
"The main message from them is, they can be patient," said TD Securities chief U.S. macro strategist Oscar Munoz. Munoz said a median projection of two rate cuts for this year would indicate they perceive recent rising inflation as a "game changer." Munoz expects the Fed to decrease rates every other policy meeting or once each quarter, which would delay policy easing until September if the central bank cuts rates twice in 2024.
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