What to expect from the Fed meeting

Washington, DC (CNN) — The Federal Reserve is expected to hold interest rates steady for the fifth time at the conclusion of its two-day policy meeting on Wednesday.

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It will also reiterate that officials want to see more data before lowering borrowing costs or possibly keeping them elevated for even longer. Officials will also release a fresh set of economic projections, which will give Wall Street some clues on the timing and pace of rate cuts this year.

Inflation slowed steadily throughout 2023, but stubborn price pressures persisted in the beginning of the year. That hotter-than-anticipated inflation spooked investors and dashed hopes of the first interest rate cut coming as soon as this week. Traders are now overwhelmingly betting that the first cut will come sometime in the summer, according to futures.

Fed Chair Jerome Powell said in congressional testimony earlier this month that the central bank wants to see “just a bit more evidence” that inflation is on its way to the 2% target. He made it clear that rate cuts for this year remain on the table and that the Fed will likely not hike again.

The Fed chief is expected to reiterate in his post-meeting news conference that officials are still in wait-and-see mode. In addition to Powell’s comments, investors will also be paying close attention to the Fed’s latest economic projections, or the so-called dot plot, to see if officials now expect fewer rate cuts this year than they estimated in December, which was three.

“There likely won’t be any big changes in their forecasts, so the biggest focus should be on Chair Powell’s remarks and how he messages their reaction to the last two monthly inflation readings that we’ve gotten,” Kathy Bostjancic, chief economist at Nationwide, told CNN.

Has inflation’s slowdown stalled?

In January, markets followed the Fed’s lead and priced in several rate cuts in 2024, beginning as soon as this month. That was after inflation steadily slowed throughout the second half of 2023. However, the Consumer Price Index for January came in hotter than expected, triggering a brief selloff on Wall Street. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, similarly showed stubborn prices in the beginning of the year.

February inflation readings were also disappointing. Rising shelter costs and a sharp climb in gas prices together contributed to 60% of the monthly jump in prices last month, according to CPI. Consumer prices were up 3.2% in February from a year earlier, higher than economists’ expectations.

While America’s inflation problem has improved greatly, it remains stubborn for the price of services and housing. The US economy’s persistent strength could be standing in the way of any further improvement on the inflation front. The Atlanta Fed is currently projecting first-quarter GDP to come in at a solid 2.1% annualized rate, following two straight quarters of growth above 3%.

The job market also remains on strong footing. Employers added a stronger-than-expected 275,000 jobs in February as the unemployment rate edged higher to 3.9%, the 25th consecutive month that the nation’s jobless rate has been below 4%. New applications for jobless benefits, often seen as the earliest sign of any changes in the labor market, remain at historically low levels.

A difficult balancing act

The Fed is currently dealing with the difficult task of determining when is the right time to begin cutting rates. There are consequences both if the cuts come too soon and if the cuts are too late.

“We anticipate the Fed Chair will note the two-sided risks of easing monetary policy too soon or too late, but maintain a hawkish bias, focusing on the fact that reducing policy restraint too soon or too much could result in a reversal of the progress seen in inflation,” Gregory Daco, chief economist at EY-Parthenon, wrote in a note released Friday.

Still, officials are very much attuned to the risks of cutting too late. In addition to stabilizing prices, the Fed is also tasked with achieving maximum employment, which has arguably already happened, with unemployment low and job growth still humming along.

But the economy is at risk if officials keep rates elevated and inflation does continue to slow, which would mean that inflation-adjusted interest rates are rising.

“If you look historically, we’re high. And the longer we stay at that — if inflation continues falling — we’re going to have to start thinking about the employment side of the mandate,” Chicago Fed President Austan Goolsbee told CNBC earlier this month.

The Fed’s policy-making committee is set to announce its latest decision on rates at 2 pm ET Wednesday, followed by a news conference from Chair Powell at 2:30 pm ET.