(Bloomberg) — The debate for the Federal Reserve is beginning to shift from how many times to cut interest rates this year to whether to cut them at all in 2024.
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Policymakers are widely expected to hold rates steady at a more than two-decade high at the conclusion of their meeting Wednesday, so much of the focus will be on any pivot in the tone of the post-meeting statement and Chair Jerome Powell’s press conference.
Officials are also expected to announce a near-term slowing in the reduction of the Fed’s $7.4 trillion balance sheet — a move that’s independent from any decision on interest-rate timing. Policymakers have voiced the need for a cautious approach to further runoff, hoping to avoid market turmoil.
Following worse-than-hoped inflation reports during the first three months of the year, Powell said that it would likely take “longer than expected” to become confident inflation is moving toward the central bank’s 2% target. The central bank, he added, can keep rates high “as long as needed.”
While Fed leadership has suggested a delay for rate reductions, it’s starting to look like a real possibility policymakers may not cut at all this year.
“If the inflation numbers just don’t improve enough, then they’ll stay on hold indefinitely,” said Dean Maki, chief economist at Point72 and a former Fed economist. “We have had a setback in the first quarter, but I don’t think the center of the committee thinks of it as a permanent setback. They think it’s a bumpy road still.”
Powell’s colleagues on the Federal Open Market Committee see no urgency to lower rates.
Governor Michelle Bowman said she sees “upside risks” to inflation, and Minneapolis Fed President Neel Kashkari floated the possibility of having no rate cuts this year. The Atlanta Fed’s Raphael Bostic, meanwhile, said he could favor hiking them if inflation gets worse.
Swaps traders now see only one Fed rate reduction for all of 2024, well below the roughly six quarter-point cuts they expected at the start of the year. The FOMC, which will update its rate forecasts at the June 11-12 meeting, penciled in three cuts for this year at their March gathering, though the margin was razor thin.
Fed officials won’t update their quarterly rate projections — known as the “dot plot” — this week. Still, the latest inflation data will loom over the discussions and the committee could tweak the language in its post-meeting policy statement to reflect heightened concern.
“There is debate on whether there are cuts at all,” said Diane Swonk, chief economist at KPMG LLP, who is looking for the committee to consider a new message. “The Fed has no choice but to stand down on rate cuts.”
The Fed’s preferred gauge of underlying US inflation rose at a brisk pace in March, a third straight month of disappointing reports, data out Friday showed. After falling sharply in the second half of 2023, progress has stalled with annual inflation by the Fed’s preferred measure at 2.7% in March, or slightly higher excluding volatile food and energy prices.
Much of this week’s FOMC statement will be similar to March, however, the committee might acknowledge that inflation progress has waned in recent months. Powell could reprise his comments from his most recent remarks, in which he said he favored giving policy more time to work given that the US economy remains strong overall.
Annual inflation is set to make little progress in the second half of the year, as the figures will be compared to a period in late 2023 when price pressures were rapidly easing. That could make it harder for Fed officials to justify a rate cut as the year goes on, some Wall Street economists have said.
‘Rule of Thumb’
Still, policymakers could take comfort in continued progress on month-to-month inflation readings. A “good rule of thumb” would be it might take at least three months of better inflation numbers for officials to consider a cut, likely pushing the discussion to September or later, Point72’s Maki said.
While Fed officials have stressed the central bank makes decisions without regard to the political impact, cutting for the first time in September would invite heightened scrutiny ahead of the presidential election in November.
Powell has kept the committee united in its rate path, with no dissents in nearly two years, but there are some signs of strains. Until recently, Powell had sounded dovish on rates, and this week he may adopt a tone that leans more into questions of the need for cuts.
“We’ve had a few months of difficult communications,” said Ellen Meade, a Duke University professor and former Fed board senior adviser. “We’ve seen policymakers pushing back against Powell forcefully since the March meeting.”
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