WASHINGTON, DC - U.S. Federal Reserve Bank Board Chairman Jerome Powell answers reporters' questions ... [+]
A lack of improving inflation data from Q1 of 2024 is expected to delay a potential first interest rate cut from the Federal Open Market Committee until at least July and perhaps later. Monthly Consumer Price Index data for January, February and March signaled that the path to achieving the FOMC’s 2% annual inflation goal is not going to be straightforward.
That’s because headline CPI has increased on an annual basis since January 2024, according to the two most recent data releases. Disinflation remains, once food and energy prices are stripped out, but perhaps at a slowing pace. For March 2024, headline annual CPI inflation stands at 3.5%, and excluding food and energy, it’s 3.8%. That recent inflation data may not be good enough for the FOMC to cut interest rates in the short term.
Upcoming FOMC Meetings
Fixed income markets see almost no chance that the FOMC cuts at its upcoming meeting in May, according to the CME FedWatch Tool. There is about a 1 in 4 chance of a June cut currently, but that’s down significantly from before March’s CPI data was reported.
Markets now see the first rate cut most likely coming in July or later, with an emerging, but low, probability that the Fed does not cut rates at all in 2024. The FOMC last increased interest rates in July 2023, so peak rates could ultimately last 12 months or more. That would be unusual, as the FOMC has historically moved quickly to cut rates after their final hike. But this economic cycle has been unusual in many ways.
Fed officials did project on March 20 that two or three interest rate cuts could come in 2024, according to the Summary of Economic Projections. However, that was before March’s CPI release, making it a somewhat stale forecast.
Still, FOMC policymakers have said many times that they believe the economy likely is at peak interest rates currently. Economic projections from FOMC policymakers will next be updated on June 12.
Jobs Data
Jobs data matters, too. However, the most recent employment situation report for March suggests a relatively healthy U.S. job market. Fears of an economic slowdown, as could be implied by a weaker jobs market, might encourage the FOMC to cut rates. That’s due to the FOMC’s dual mandate of controlling inflation and sustaining employment. So far the FOMC has been able to be patient and hold rates at relatively high levels as it monitors inflation data, looking for sustained improvement. If jobs data were to weaken substantially, the FOMC would have a dilemma in trading off the desire to tame inflation against promoting strong employment.
What To Expect
For now, there is concern that though the wave of more extreme inflation is over, underlying inflation remains significantly above the Fed’s 2% goal. As the job market remains relatively robust, the Fed has time to wait and see how inflation data evolves.
In 2024, evidence of further disinflation has been sparse so far, likely pushing back any interest rate cuts compared to earlier expectations. The FOMC is still expected to cut rates in 2024, but there may be fewer cuts and with a later start than previously estimated.
