Fed rate cuts likely this year, but in a measured way driven by inflation management

In its first rate meeting of 2024 on January 31, the US central bank – Federal Reserve left its benchmark interest rate unchanged, keeping its benchmark lending rate at a 23-year high, as Wall Street eagerly awaits rate cuts sometime this year.
This is amid signs of steadily cooling inflation and solid economic growth.
But the question on the minds of economists, consumers and businesses alike is when will the Fed likely to start cutting its benchmark interest rate?
The latest data showed that in the 12 months through December, US consumer prices edged 3.4% higher after increasing 3.1% in November, tempering expectations of an interest rate cut in March. The pace of price rises, however, has slowed from a peak of 9.1% in June 2022. The Fed targets an inflation rate of 2%.
The US central bank’s policy rate currently stands in the 5.25%-5.50% range after 525 basis points of hike since March 2022.
The Fed has raised rates 11 times since March 2022 in a bid to combat the fastest inflation in decades, according to CNN. Price hikes have eased substantially since then, inching closer to the Fed’s 2% target.
That means the Fed is due to cut rates in 2024, which officials themselves projected last month, but the central bank’s latest policy statement pushed back on expectations of the first rate cut coming in March.
“The committee does not expect it will be appropriate to reduce the target range for the federal funds rate until it has gained greater confidence that inflation is moving sustainably toward 2%,” the statement read.
In his post-meeting news conference, Fed Chair Jerome Powell said, “There was no proposal to cut rates and that cutting in March is probably not the most likely case.
“Officials need to see greater confidence that inflation is on a sustainable path toward 2% before considering rate cuts,” he said.
No rate cut in March is something Fed officials have been communicating for weeks now, and Wall Street has been slow to come to grips with that guidance.
Although many economists believe that there will be rate cuts this year, they are divided on the appropriate schedule for rate cut in 2024.
Many economists believe there are consequences if the Fed cuts rates too soon and if it cuts too late.
The Fed chief detailed what conditions need to be in place for the Fed to feel confident enough that it is time to start cutting rates. Mainly, it’s more data showing inflation is easing.
“That six months of good inflation data, is it sending us a true signal that we are, in fact, on the sustainable path down to 2% inflation?. The answer will come from some more data that is also good data.”
Powell has previously said rates should be cut before inflation reaches 2% because it is widely understood that monetary policy has a lagged effect on the broader, real economy.
The general notion is that the Fed may ultimately cut interest rates in 2024, but in a measured way and with action weighted toward the second half.