At the start of 2024, investors expected the Federal Reserve to cut interest rates substantially this year as inflation cooled. But price increases have been surprisingly stubborn, and that is forcing a rethink on Wall Street.
Investors and economists are questioning when and how much Fed policymakers will manage to cut rates — and some are increasingly dubious that Fed officials will manage to lower them at all this year.
Inflation was coming down steadily in 2023, but that progress has stalled out in 2024. The Fed’s preferred inflation index climbed 2.8 percent in March from a year earlier, after stripping out volatile food and fuel costs, data on Friday showed. While that is down substantially from a 2022 peak, it is still well above the central bank’s 2 percent goal.
Inflation’s stickiness has prompted Fed officials to signal that it may take longer to reduce interest rates than they had previously expected. Policymakers raised interest rates to 5.33 percent between March 2022 and last summer, and have held them there since. Investors who came into the year expecting a first rate cut by March have pushed back those expectations to September or later.
Some analysts are even beginning to question whether the Fed’s next move might be to raise rates, which would be a huge reversal after months in which Wall Street overwhelmingly expected the Fed’s next step to be a cut.
But most economists think that it would take a lot for the Fed to switch gears that drastically.
“It’s certainly a possible outcome, but it would require an outright acceleration in the inflation rate,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Source Agencies
