Slowing America’s rapid inflation has been an unexpectedly painless process so far. High interest rates are making it expensive to take out a mortgage or borrow to start a business, but they have not slammed the brakes on economic growth or drastically pushed up unemployment.
Still, price increases have been hovering around 3.2 percent for five months now. That flatline is stoking questions about whether the final phase in fighting inflation could prove more difficult for the Federal Reserve.
Fed officials will have a chance to respond to the latest data on Wednesday, when they conclude a two-day policy meeting. Central bankers are expected to leave interest rates unchanged, but their fresh quarterly economic projections could show how the latest economic developments are influencing their view of how many rate cuts are coming this year and next.
The Fed’s most recent economic estimates, released in December, suggested that Fed officials would make three quarter-point rate cuts by the end of 2024. Since then, the economy has remained surprisingly strong and inflation, while still down sharply from its 2022 highs, has proved stubborn. Some economists think it’s possible that officials could dial back their rate cut expectations, projecting just two moves this year.
By leaving rates higher for slightly longer, officials could keep pressure on the economy, guarding against the risk that inflation might pick back up.
“The Federal Reserve should not be in a race to cut rates,” said Joseph Davis, Vanguard’s global chief economist, explaining that the economy has held up better than would be expected if rates were weighing on growth drastically, and that cutting prematurely risks allowing inflation to run warmer in 2025. “We have a growing probability that they don’t cut rates at all this year.”
