Federal Reserve to Decide on Interest Rates Amid High Inflation Concerns

Following three consecutive reports of higher-than-expected inflation, Federal Reserve officials have become increasingly cautious about the possibility of reducing interest rates this year.

This Wednesday, the Fed will hold its latest meeting, and the burning question now is whether they will continue to signal any rate cuts for 2024. Federal Reserve Chair, Jerome Powell, recently stated that the pace of price increases has shaken the confidence of Fed officials due to persistent high inflation, making cuts less likely in the short term.

He also mentioned that the Federal Reserve would forgo any rate cuts as long as inflation remains elevated. However, he did not suggest that new rate hikes were being considered. “If higher inflation persists, we can maintain the current rate (of interest) for as long as necessary,” said Powell.

Wall Street traders now anticipate only one rate cut this year from the Federal Reserve’s benchmark rate, currently at a 23-year peak of 5.3% after 11 increases that ended last July. Traders have drastically reduced their expectations since the beginning of 2024 when up to six cuts were anticipated.

Rate cuts by the Federal Reserve would eventually lead to lower borrowing costs for consumers and businesses, including mortgages, car loans, and credit cards.

Most economists still expect two cuts this year. However, many acknowledge that one or even no reductions may occur. This is largely due to inflation being more persistent than nearly anyone anticipated. According to the Federal Reserve’s preferred indicator, the inflation rate reached an annual rate of 4.4% in the first three months of 2024, up from 1.6% in the last quarter of 2023 and well above the Fed’s 2% target.

Simultaneously, the economy is healthier and hiring stronger than most economists had expected. The unemployment rate has remained below 4% for over two years, the longest stretch since the 1960s. During the first quarter of the year, consumer spending was robust. Consequently, Powell and other Federal Reserve officials have made it clear they are in no rush to lower their benchmark rate.