Fed likely to hint interest rates will stay higher for longer. But how high for how long?
The Federal Reserve meets this week for the first time since recent high inflation readings dampened hopes that the central bank would lower interest rates three times this year.
The prospect of three rate cuts had juiced the stock market and led analysts to boost their 2024 economic growth forecasts.
Though stocks initially tumbled following the disappointing inflation reports, they’ve partly rebounded the past week on strong earnings from Big Tech companies.
At the close of a two-day meeting that starts Tuesday, the Fed was expected to keep its key short-term interest rate unchanged at a 23-year high of 5.25% to 5.5%. Fed officials aren’t scheduled to update their March forecasts on the economy, inflation and rates. But Fed Chair Jerome Powell could provide clues on where he thinks interest rates are headed.
Fed meeting live updates:: What's next for interest rates?
Here's a breakdown:
Is inflation increasing right now?
Inflation eased substantially last fall. After hitting a 40-year high of 9.1% in mid-2022, annual inflation fell from 3.7% to 3.1% in the second half of 2023, and a core measure that strips out volatile food and energy items dipped below 4%, according to the consumer price index (CPI).
But prices jumped each month in the first quarter of 2024, leaving yearly inflation at 3.5% in March and the core measure at 3.8%.
Another inflation gauge called the personal consumption expenditures index (PCE) – which the Fed watches more closely - followed a similar pattern, though it’s running about a percentage point lower. Overall inflation is at 2.7% and the core measure is at 2.8%, still well above the Fed’s 2% goal, according to the PCE.
Why did inflation slow down last year?
The price of used cars, furniture and other goods dropped as pandemic-related supply chain bottlenecks resolved.
Why has inflation recently risen so high?
The cost of services such as rent, car insurance and health care has continued to climb sharply, partly because of rising wages linked to COVID-19-induced labor shortages.
What does Jerome Powell say about inflation?
Initially, Powell said price increases in January and February simply could have been blips on a steady path to 2% inflation. And Fed officials’ forecast for three rate cuts this year remained intact. But after CPI and PCE reports last month showed that prices surged again in March, Powell took a different tone.
“The recent data have clearly not given us greater confidence (that inflation is heading sustainably to 2%) and instead indicate that it’s likely to take longer than expected to achieve that confidence,” he said at a forum a couple of weeks ago.