Washington — The Federal Reserve signaled Wednesday that interest rate cuts are not imminent and left them unchanged for now.
The decision not to change rates appears to indicate that the country’s central bankers hope to wait until they are sure that inflation, which has fallen from its peak, is moving reliably toward its 2% target. The central bank’s benchmark rate influences the cost of most consumer and business loans, and businesses, investors and individuals have been eager for the central bank to ease the cost of borrowing.
The Federal Reserve is assessing the economy at a time when the escalation of the presidential race depends largely on voters’ perceptions of President Joe Biden’s economic management. Republicans in Congress have tried to link Biden to the high inflation that gripped the nation starting in 2021. But the most recent polls indicate growing confidence in the economy.
Most Fed watchers believe the central bank’s first rate cut will come in May or June. Late last year, Wall Street investors had bet that a rate cut in March was all but certain. But cautionary comments from several Fed officials have dispelled most expectations of a cut so soon.
The economy remains healthy and does not appear to need the stimulative benefits of a rate cut, which can spur more borrowing and spending and could even reignite inflation.
Additionally, the stock market is near a record high, and the yield on the influential 10-year Treasury note, just above 4%, is well below its peak of nearly 5% last fall. Average long-term mortgage rates, which generally track the 10-year yield, have fallen from nearly 8% to about 6.7%.
“The Fed is probably thinking that they’re not really in any hurry, that there’s no need to rush to cut rates,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale, a French bank. “That’s why markets started to question the March rate cut.”
The economy expanded faster than expected in the final three months of the year, the government said last week. Its report showed that growth reached a surprisingly strong annual rate of 3.3%, much higher than expected, after an expansion pace of 4.9% in the July-September quarter.
Consumers drove much of last quarter’s growth, with Americans opening their wallets for holiday shopping and spending freely on major purchases like cars, appliances and furniture. That spending is benefiting companies like General Motors, which reported Tuesday that its revenue grew 10% last year and that it made $10 billion in profits despite a six-week strike by the United Auto Workers union.
Public sentiment has also improved. Consumer confidence rose in January for the third straight month, according to the Conference Board, a business research group, to the highest level in two years. Growth has been strong even as inflation has moved closer to the Federal Reserve’s 2% target.
In fact, measured over the past six months, inflation excluding volatile food and energy costs has slowed to an annual rate of 1.9%, according to the Federal Reserve’s preferred measure of inflation. Compared to the previous year, total prices increased by 2.6% in December.
A year ago, many analysts predicted that widespread layoffs and much higher unemployment would be needed to cool the economy and curb inflation. However, strong hiring has persisted. The unemployment rate, at 3.7%, is not far above a half-century low.
However, some cracks have started to appear in the labor market, and if they worsen, they could prompt the Federal Reserve to cut rates more quickly. For several months, for example, most of the job growth has come in a few sectors: health care, government, and hotels, restaurants and entertainment. Any weakening in those areas of the economy could threaten hiring and overall expansion.
And a report on Tuesday showed that the number of workers who quit in December hit its lowest level in three years. That suggests fewer Americans are being recruited for new, higher-paying jobs or are willing to seek and accept new positions. Although resignations remain at a level consistent with a strong labor market, they have fallen by about a third from their peak in mid-2022.
Still, the U.S. economy is outperforming its counterparts abroad. During the October-December quarter, the 20 countries that share the euro barely avoided a recession and recorded virtually no growth. Still, as in the United States, unemployment is very low in the euro zone and inflation has slowed to an annual rate of 2.9%. Although the European Central Bank could cut rates as early as April, many economists believe that may not happen until June.