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Federal Reserve likely to scale back rate cut plans due to persistent inflation
WASHINGTON (AP) — Federal Reserve officials will likely make official on Wednesday what has been clear for many weeks: with inflation remaining at a level above the 2% targetare reducing their outlook for interest rate cuts.
In a set of quarterly economic forecasts that they will publish after the end of their last meeting, policymakers are expected to project that they will cut their benchmark rate just once or twice by the end of the year, instead of the three times they had anticipated. . in March.
The Fed’s tariff policies typically have a significant impact on the costs of mortgages, auto loans, credit card rates and other forms of consumer and business lending. Lowering its rate-cutting outlook would mean those borrowing costs would likely remain higher for longer, a disappointment to potential homebuyers and others.
Still, the Fed’s quarterly projections of future interest rate cuts are by no means fixed in time. Policymakers frequently review their rate reduction plans — or increases — depending on how economic growth and inflation measures evolve over time.
But if borrowing costs remain high in the coming months, it could also have consequences for the presidential race. Although the unemployment rate is low at 4%, hiring is robust, and consumers continue to spend, voters have taken a general stance bitter view of the economy under President Joe Biden. In large part, this is because prices remain much higher than they were before the pandemic. High financing rates impose an additional financial burden.
The Fed’s updated economic forecasts, which will be released Wednesday afternoon, will likely be influenced by the government’s May inflation data, which will be released this morning. The inflation report is expected to show that consumer prices, excluding volatile food and energy costs – so-called underlying inflation – rose 0.3% from April to May. That would be the same as the previous month and higher than what Fed officials would prefer to see.
Global inflation, controlled by falling gas prices, is thought to have risen just 0.1%. Measured in relation to the previous year, consumer prices are expected to have risen 3.4% in May, the same as in April.
Inflation had fallen steadily in the second half of last year, raising hopes that the Fed could achieve a “soft landing” through which it could beat inflation through rate hikes without causing a recession. Such an outcome is difficult and rare.
But inflation reached unexpectedly high values in the first three months of this yeardelaying the Fed’s expected rate cuts and potentially putting a soft landing at risk.
In early May, Chairman Jerome Powell said the central bank needed more confidence that inflation was returning to its target before cutting its benchmark rate. Powell noted that it would likely take longer to earn that trust than Fed officials 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 considering supporting rate cuts. Although Waller didn’t specify what would constitute good data, economists think it would have to be underlying inflation of 0.2% or less each month.
Powell and other Fed policymakers have also said that as long as the economy remains healthy, they see no need to cut rates anytime soon.
“Fed officials have clearly signaled that they are taking a wait-and-see approach with regard 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 tariff policies depends heavily on the most recent developments in economic data. In the past, the central bank would have given more weight to the prospects for 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, global chief economist at Citi and a former top economist at the Fed.
“Nobody,” Sheets said, “has had success forecasting inflation” over the past three to four years.