The Federal Reserve is expected to take a step towards cutting its key interest rate after a nearly two-year period of hikes aimed at combating high inflation. However, the central bank is unlikely to provide a clear indication of when or at what pace it will do so.
Although a rate cut is expected within the next few months, the Federal Reserve is expected to signal that it will wait until it is confident that inflation is steadily moving towards its target of 2%. Many businesses, investors, and individuals have been eagerly awaiting a decrease in borrowing costs as the central bank's benchmark rate influences the cost of most consumer and business loans.
The decision comes at a time when the presidential race is heavily influenced by voters' perceptions of President Joe Biden's economic stewardship. Republicans in Congress have sought to tie Biden to the high inflation experienced in 2021. However, recent surveys indicate a growing confidence in the economy.
Most experts believe that the first rate reduction by the Federal Reserve will occur in May or June. The expectation of a rate cut in March has diminished due to cautious remarks made by several Fed officials.
Chair Jerome Powell may emphasize during a news conference on Wednesday that there is little urgency to start cutting rates. The economy remains robust and does not appear to require the stimulative benefits of a rate cut, which could potentially lead to more borrowing, spending, and even a resurgence in inflation.
Furthermore, the stock market is near its record high, and the yield on the 10-year Treasury note, a significant benchmark, is currently above 4%, much lower than its peak of nearly 5% last fall. Average long-term mortgage rates, which generally follow the 10-year yield, have declined from almost 8% to around 6.7%.
'The Fed's probably thinking they're not really in any rush, there's no need to really rush into cutting rates,' said Subadra Rajappa, head of U.S. rates strategy at Société Générale. The economy expanded faster than expected in the final quarter of 2022, growing at a robust annual rate of 3.3%, and consumer confidence has been on the rise.
Last quarter's growth was mainly driven by consumer spending, as Americans opened their wallets for holiday shopping and made significant purchases such as cars, appliances, and furniture. Companies like General Motors have also benefited, reporting a 10% revenue growth for the year and $10 billion in profit despite a labor strike.
Although inflation has been approaching the Fed's target, it has slowed down in the past six months to a rate of 1.9% excluding food and energy costs. In December, overall prices rose by 2.6% compared to the previous year.
While analysts previously predicted that significant layoffs and higher unemployment would be necessary to cool the economy and curb inflation, solid hiring has continued. The unemployment rate remains low at 3.7%, close to a 50-year low.
However, there are signs of weakness in the job market that, if they worsen, could prompt the Fed to cut rates more quickly. Job growth has mostly been concentrated in a few sectors, such as health care, government, and hospitality. Any decline in these areas could threaten overall hiring and economic expansion.
Additionally, a recent report showed that the number of workers quitting their jobs in December reached a three-year low. This suggests that fewer Americans are being recruited for higher-paying jobs or are unwilling to search for and accept new positions. Although job market conditions remain solid, the number of quits has fallen by approximately one-third from its peak in mid-2022.
While the United States economy is outperforming its counterparts overseas, with the twenty countries that share the euro currency barely avoiding a recession in the last quarter, unemployment remains low in the euro area and inflation has slowed to a 2.9% annual rate. The European Central Bank is also considering cutting rates, with April or even June as potential dates.
Overall, the Federal Reserve is expected to take a cautious approach to rate cuts as it awaits further confirmation of inflationary trends. With a healthy economy, a record-breaking stock market, and low unemployment, the Fed may not feel a sense of urgency to reduce rates. The decision, however, remains crucial for businesses, investors, and individuals eagerly anticipating the potential benefits of lower borrowing costs.
