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Wishful Thinking
Late last year, investors were anticipating that the Federal Reserve would cut interest rates by as much as 150 basis points in 2024. Three months later, they’re still waiting for the first move. On Wednesday, the Federal Open Market Committee held the benchmark federal funds rate steady in the range of 5.25% to 5.5%. It turns out, inflation has declined but not enough to please FOMC members.
The Fed’s inflation target is 2%, and in February, the consumer price index rose at an annual rate of 3.2% — down from 6% reported a year earlier but still not good enough. Plenty of economic indicators, including employment, remain strong, giving the Fed fewer reasons to cut rates. “Recent indicators suggest that economic activity has been expanding at a solid pace,’’ the Fed said in a statement released Wednesday. “Job gains have remained strong, and the unemployment rate has remained low.”
The good news is that, for now at least, rate cuts appear likely later this year. The median fed funds rate projection offered by individual FOMC members was 4.6%, implying three .25% rate cuts between now and the end of 2024. Stocks jumped on the news. On Wednesday, all three major indexes – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq composite – finished at record highs.
Striking the right balance on rate changes remains critical as the Fed continues its pursuit of a soft landing. “The risks are really two-sided here,” Fed Chairman Jerome Powell said in a news conference. “If we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment and … people’s working lives.”
What does that mean in practical terms? Tellingly, the median rate projection among FOMC members for 2025 jumped to 3.9% from 3.6% in December. That would suggest two, maybe three, .25% rate cuts next year – a sign that the Fed could be inclined to move more cautiously than many bankers and investors would like.
• Naomi Snyder, editor-in-chief for Bank Director
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