5 things to know about the Fed’s March rate decision

The U.S. Federal Reserve is expected to hold interest rates unchanged on Wednesday after a series of strong economic data delayed the central bank’s plans to cut interest rates by the end of the year.

The Fed ended 2023 with a steady decline in inflation and a slight slowdown in the job market after raising interest rates to a range of 5.25% to 5.5%.

Members of the Federal Reserve’s rate-setting committee, the Federal Open Market Committee (FOMC), said in December that they expected to start lowering rates as early as March because the economy was on track for a soft landing. I expected it.

But the economy had other plans.

Job growth accelerated in 2024, with job gains for the third straight month exceeding economists’ expectations. The unemployment rate remains below 4% for the longest period since the Nixon administration, and inflation remains too high for the Fed and most Americans to tolerate.

“Inflation in January and February was higher than expected. [Wednesday’s] “The meeting is too early for the Fed to start cutting rates,” said Bill Adams, chief economist at Comerica Bank.

“However, inflation and its underlying drivers (such as the housing shortage) are gradually improving, and the Fed is expected to begin lowering rates at some point in its next few meetings,” Adams continued.

However, this decision will provoke a backlash from the left. On the left, a growing number of Democrats and progressive nonprofits are calling on the Fed to ease the economy before it slows too much.

Here are five things to know about the Fed’s likely decision to keep interest rates on hold.

Job market is stronger than expected

Despite the Federal Reserve’s decision to raise interest rates to the highest level in 20 years, the job market has continued to perform better than expected in recent months.

The U.S. economy added 275,000 jobs in February, more than economists expected. Last month’s numbers were similarly higher than expected, but the Labor Department revised down its job growth estimates for December and January to 290,000 and 229,000, respectively.

The unemployment rate rose slightly last month to 3.9%, but maintained its longest streak below 4% in more than 50 years.

A strong job market is generally a positive sign, but the central bank’s interest rate hikes were aimed at slowing the economy and, by extension, inflation, which could make the Fed hesitant to start cutting rates.

Inflation is trending flat

Despite significant easing over the past two years, inflation remains higher than the Fed would like.

The consumer price index, which is closely watched as an indicator of inflation, reached a 40-year high of 9.1% in June 2022, but fell to 3.1% by January 2024.

However, inflation accelerated slightly again in February, with consumer prices increasing by 0.4 points from the previous month and 3.2% from a year earlier.

The Personal Consumption Expenditure Price Index, another inflation measure the Fed tracks, fell to 2.4% in January. The central bank hopes this number will fall steadily to 2% before declaring victory for inflation and starting to cut interest rates.

“[Chair Jerome Powell] Other Fed officials have repeatedly said the first rate cut this cycle will depend on, and be determined solely by, better data on inflation. “It’s not about predicting inflation based on the good data the Fed already has,” wrote Claudia Sahm, an economic consultant and former Fed research director. Tuesday analysis.

Fed officials express caution

Federal Reserve Chairman Jerome Powell warned earlier this month that the central bank’s rate-setting committee was not convinced that inflation had been sufficiently overcome to start cutting rates.

“The committee does not believe it is appropriate to lower the target range until there is greater confidence that inflation is on a sustained path toward 2%,” Powell told the House Financial Services Committee. Stated.

Markets had previously expected a rate cut in March, but Powell said this was “probably not the most likely case” after the Fed opted to keep rates on hold again at the January Fed meeting. he warned.

Minneapolis Fed President Neel Kashkari, who does not vote on the rate-setting committee, said last month that he expected two or three rate cuts this year.

“If the labor market continues to be very strong, then we can confidently say, ‘Well, we can recover from this pretty slowly,'” he said at the time. “If we see a significant slowdown in the labor market, we’ll say, ‘Maybe we need to start cutting rates a little bit sooner.'”

Mr. Kashkari’s outlook is broadly in line with that of his fellow Fed officials in December. He said all but three officials expected at least two cuts in 2024, with the most expecting three. The Fed is scheduled to release new forecasts on Wednesday.

Wall Street expects interest rate hikes to taper

Strong economic data and tough comments from Fed officials dampened Wall Street’s hopes for a rate cut in March.

In December, shortly after the FOMC predicted a series of rate cuts next year, financial markets saw a 75% chance of a March rate cut, according to the CME FedWatch tool, which tracks future market changes related to Fed moves. there was.

This probability fell to 40% by the end of January, 15% by early March, and bottomed out this month.

“We fully expect the Federal Reserve to leave interest rates unchanged at its March meeting,” said Stephen Rich, chairman and CEO of Mutual of America Capital Management. .

“While the current consensus expectation is for the Fed to make its first rate cut in June, we believe a rate cut remains difficult given robust inflation and resilient consumer and job markets.” Rich added.

Progressives want the Fed to cut interest rates anyway

The Fed’s cautious stance is likely to irritate Democratic lawmakers and progressive activists who have ramped up pressure on the central bank to cut rates after fiercely opposing the previous rate hike.

Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) joined Rep. Pramila Jayapal (D-Wash.) and more than 20 House Democrats in a letter Monday. In a letter to the Fed, he argued that there was no longer a need for the policy. High interest rates are increasing pressure on American household budgets.

“Core inflation is already in line with the Federal Reserve’s target, and today’s overly contractionary monetary policy will unnecessarily exacerbate housing market imbalances and homeownership affordability, and bank “This could create risks to the stability of the United States and threaten its robust employment and wage growth and its associated reductions in economic and racial inequality,” the lawmakers wrote.

Democrats also warned that the Fed could cause a recession by keeping interest rates too high for too long, potentially reversing years of strong job growth under President Biden just before the November election. I am concerned that there is.

A recession could be devastating to Biden’s chances of defeating his expected Republican challenger, former President Trump, and Trump is against moves to lower interest rates under the Biden administration. likely to lash out at the Fed.