Federal Reserve is likely to scale back plans for rate cuts because of still-elevated inflation

Jun 12, 2024, 10:15 AM

FILE - Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Res...

FILE - Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve, Jan. 31, 2024, in Washington. The Federal Reserve releases minutes from its January meeting, when it kept its key short-term interest rate unchanged for a fourth straight time, on Wed., Feb. 21, 2024. (AP Photo/Alex Brandon, File)

(AP Photo/Alex Brandon, File)

WASHINGTON (AP) — Federal Reserve officials on Wednesday will likely make official what’s been clear for many weeks: With inflation sticking at a level above their 2% target, they’re downgrading their outlook for interest rate cuts.

In a set of quarterly economic forecasts they will issue after their latest meeting ends, the policymakers are expected to project that they will cut their benchmark rate twice by year’s end, rather than the three times they had envisioned in March.

The Fed’s updated economic forecasts, which it will issue Wednesday afternoon, will likely be influenced by the government’s May inflation data, released Wednesday morning. That report showed that inflation cooled unexpectedly. Overall prices were unchanged from April to May. And so-called core prices, which exclude volatile food and energy costs, rose just 0.2%, the smallest monthly rise since October.

Measured from a year earlier, consumer prices rose 3.3% in May, down from 3.4% the previous month. Year-over-year core inflation slowed from 3.6% in April to 3.4% in May, the mildest annual pace in three years.

The Fed’s rate policies typically have a significant impact on the costs of mortgages, auto loans, credit card rates and other forms of consumer and business borrowing. The downgrade in their outlook for rate cuts would mean that such borrowing costs would likely stay higher for longer, a disappointment for potential homebuyers and others.

Still, the Fed’s quarterly projections of future interest rate cuts are by no means fixed in time. The policymakers frequently revise their plans for rate cuts — or hikes — depending on how economic growth and inflation measures evolve over time.

But if borrowing costs remain high in the coming months, they could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.

Inflation had fallen steadily in the second half of last year, raising hopes that the Fed could achieve a “soft landing,” whereby it would manage to conquer inflation through rate hikes without causing a recession. Such an outcome is difficult and rare.

But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperiling a soft landing.

In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate. Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought.

Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “several more months of good inflation data” before he would consider supporting rate cuts. Though Waller didn’t spell out what would constitute good data, economists think it would have to be core inflation of 0.2% or less each month.

Powell and other Fed policymakers have also said that as long as the economy stays healthy, they see no need to cut rates soon.

“Fed officials have clearly signaled that they are in a wait-and-see mode with respect to the timing and magnitude of rate cuts,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a note to clients.

The Fed’s approach to its rate policies relies heavily on the latest turn in economic data. In the past, the central bank would have put more weight on where it envisioned inflation and economic growth in the coming months.

Yet now, “they don’t have any confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citi and a former top economist at the Fed.

“No one,” Sheets said, “has been successful at forecasting inflation” for the past three to four years.

KSL 5 TV Live

National News

A security officer watches people taken photographs in front of the Eiffel Tower at the 2024 Summer...

Barbara Surk and Angela Charlton, Associated Press

Russian man is among those arrested in plots targeting Paris Olympics

France has been on high alert over the past few weeks as preparations to host the Olympics hit the final stretch.

3 seconds ago

The Olympic rings and cauldron from the 2002 Winter Games are pictured at Rice-Eccles Stadium at th...

Hannah Schoenbaum

Winter Olympians will compete at these 13 venues when the Games return to SLC in 2034

Continued use and upkeep of Olympic facilities not only boosted Salt Lake City's reputation as a winter sports destination but became the main selling point in its pitch to bring back the Games.

1 hour ago

FILE — Bryan Kohberger, accused of murder, arrives for a hearing on cameras in the courtroom in L...

Martha Bellisle, Associated Press

Lawyer for man charged with killing 4 University of Idaho students wants trial moved to Boise

Lawyers for the man accused of fatally stabbing four University of Idaho students are urging a judge to move his murder trial away from the county, arguing the intense media coverage and public interest in the case make it impossible for him to get a fair trial.

1 hour ago

The 2002 Olympic cauldron is pictured at the Olympic and Paralympic Cauldron Plaza at the Universit...

Lisa Riley Roche

Inside the last-minute drama that brought changes to Utah’s Olympics bid

Concerns raised about U.S. response to doping allegations caused concern award might not happen on Pioneer Day.

6 hours ago

The aftermath of Biscuit Basin's hydrothermal explosion Tuesday morning. (United States Geological ...

Andrew Adams

Explosion sends tourists running at Yellowstone National Park’s Biscuit Basin

A seismologist at the University of Utah said hydrothermal explosions like the one caught on camera at Yellowstone's Biscuit Basin early Tuesday happen as often as twice a year at the park, but scientists are working to better predict them.

10 hours ago

emergency lights...

Carlysle Price

Soldier from Provo killed by suspected DUI driver

A U.S. soldier from Provo, UT was killed after he was hit by a woman driving under the influence of alcohol Monday night.

12 hours ago

Sponsored Articles

young male technician is repairing a printer at office...

Les Olson

Unraveling the dilemma between leasing and buying office technology

Carefully weigh these pros and cons to make an informed decision that best suits your business growth and day-to-day operation. 

A kitchen in a modern farmhouse....

Lighting Design

A room-by-room lighting guide for your home

Bookmark this room-by-room lighting guide whenever you decide to upgrade your lighting or style a new home.

Photo courtesy of Artists of Ballet West...

Ballet West

The rising demand for ballet tickets: why they’re harder to get

Ballet West’s box office is experiencing demand they’ve never seen before, leaving many interested patrons unable to secure tickets they want.

Electrician repairing ceiling fan with lamps indoors...

Lighting Design

Stay cool this summer with ceiling fans

When used correctly, ceiling fans help circulate cool and warm air. They can also help you save on utilities.

Side view at diverse group of children sitting in row at school classroom and using laptops...

PC Laptops

5 internet safety tips for kids

Read these tips about internet safety for kids so that your children can use this tool for learning and discovery in positive ways.

Women hold card for scanning key card to access Photocopier Security system concept...

Les Olson

Why printer security should be top of mind for your business

Connected printers have vulnerable endpoints that are an easy target for cyber thieves. Protect your business with these tips.

Federal Reserve is likely to scale back plans for rate cuts because of still-elevated inflation