Federal Reserve officials are expected to keep interest rates steady on Wednesday, but investors and economists will be watching closely for hints about when policymakers might start to cut borrowing costs.
The central bank has kept interest rates steady at 5.3% since July after a series of rapid rate hikes since the start of 2022. Policymakers had expected several rate cuts in 2024, but inflation has remained surprisingly persistent, delaying any cuts.
At the end of their two-day meeting on Wednesday, Fed officials will release their first economic forecast since March and update their outlook for the number of interest rate cuts this year. Economists believe policymakers could expect two rate cuts by the end of the year, down from three previously. There's also a slight chance officials will predict just one rate cut.
Either way, the central bank is likely to remain cautious on a key question: when will it start lowering borrowing costs? Policymakers are not expected to cut rates in July, meaning there will be several months of data by the time they next meet on Sept. 17-18. Given that, they're likely to try to keep their options open.
“This will simply send a message of patience,” said Elena Shulyatyeva, senior U.S. economist at BNP Paribas. “We want to see inflation steadily decline, and we're happy to wait for that to happen.”
Still, investors will be closely watching Fed Chairman Jerome H. Powell's post-meeting news conference for clues as to when interest rates might finally start to fall, providing relief to potential borrowers and further stimulating financial markets.
Here's what to watch at this week's Fed meeting:
The focus is on the “dot”.
The Fed releases its statements after eight meetings a year but includes updated forecasts for inflation, unemployment, growth and interest rates only once every three months. Its latest economic forecast summary is due to be released at 2 p.m. on Wednesday.
Markets tend to pay the most attention to interest rate forecasts, often referred to as “dots,” a name that comes from a presentation in which policymakers' forecasts are displayed individually as anonymous circles arranged on a graph.
The dots will be getting more attention than usual this month because they are almost certain to fluctuate from previous forecasts: If just one official lowers their forecast, the central dot could signal two rate cuts by the end of the year, down from three.
There is a lack of urgency.
As evidence mounts that interest rates may not fall as much, or as quickly, as previously expected, a second big question emerges: When exactly will the rate cuts start?
Probably not anytime soon: Employers are adding jobs, the economy is expanding at a moderate pace and there is a lot of uncertainty about how much and how quickly inflation will subside, so officials suggest the bigger mistake would be to cut borrowing costs too quickly and then be forced to reverse course because inflation has stalled.
Many economists believe current conditions — modest inflation combined with a robust economy — could allow for the first rate cut as soon as September, but forecasters and Wall Street investors also say it's quite likely the Fed won't start cutting borrowing costs until December.
Inflation is an uncertainty.
The big uncertainty heading into this meeting is precisely the state of inflation.
On the one hand, price growth has slowed significantly from its 2022 peak. The Consumer Price Index peaked at about 9.1% that year, but is now hovering around 3.4%. On the other hand, progress has stalled in recent months, and inflation remains above the Fed's 2% target (which the Fed officially defines using a separate, related inflation measure).
The latest CPI inflation data, due to be released at 8:30 am on Wednesday, will give policymakers an up-to-date picture of the current state of prices.
Officials have a chance to update their economic forecasts after the release, which they can revise “up until the morning of the second day of the meeting,” according to Fed rules. The guidelines don't specify a precise deadline, but a Fed spokesman noted that the Fed chairman has previously said he can update his forecasts until the morning of the final day of the meeting.
Moreover, Chairman Powell's stance may change somewhat depending on what the latest inflation data shows.
Politics is the backdrop.
What the Fed signals at this meeting could be important for households and the White House.
High interest rates are unpopular among American voters. They make borrowing more expensive to buy a home or a car, which can be costly for people with credit card balances. They also slow the economy and weaken the job market. The goal is to keep inflation down, but the journey there can be painful.
With that in mind, incumbent politicians generally don't like high interest rates. President Donald J. Trump railed against them during his presidency, and President Biden has respected the Fed's independence and avoided public criticism, but other Democrats have been less cautious. After the European Central Bank cut interest rates last week, Sen. Elizabeth Warren of Massachusetts and other Democrats wrote the Fed chairman urging him to follow suit.
“The Fed's decision to keep interest rates high will continue to widen the gap between European and US interest rates. Lower interest rates could lead to a stronger dollar and tighten financial conditions,” the lawmakers wrote.
The Fed has said it doesn't take politics into account when setting interest rates, and officials are likely to stick to that stance this week.
