Key takeaways

  • The Federal Reserve is expected to leave borrowing costs at a 23-year high of 5.25-5.5 percent, pushing back on investors’ hopes that it’ll be quick to cut interest rates.
  • Inflation is not slowing as quickly as it once was, with consumer prices rising 3.2 percent in February and hitting a hotter 3.8 percent when excluding food and energy.
  • Consumers should focus on paying off debt and improving their credit score, as interest rates are expected to stay high for the foreseeable future.

Call it wishful thinking or skepticism. Consumers and investors have been struggling to take Federal Reserve officials at their word each time they said they wouldn’t be in a hurry to cut interest rates.

Two consecutive months of hotter-than-expected inflation and economic data are now starting to get the point across.

In early January, markets put the odds of a rate cut by the Fed’s March meeting at 77 percent, historical CME Group data shows. The day a crucial employment report suggested that the U.S. economy created more than 350,000 jobs in January alone — nearly twice as many as expected — the odds fell to just 20 percent.

And now, as policymakers on the Federal Open Market Committee (FOMC) officially gear up for the meeting that was once predicted to be a pivotal point for U.S. monetary policy, the odds of a rate cut have fallen to a dismal 1 percent.

U.S. central bankers are widely expected to leave borrowing costs at their 23-year high of 5.25-5.5 percent. The main point of discussion, though, will be whether economic data has simply confirmed the Fed’s suspicions that it’s not yet time to reduce the key interest rate that influences virtually all financing costs that consumers pay — or whether it’s convinced them to rethink their rate cut plans entirely.

The Fed is going to be slower than a lot of people think they will be to cut rates. They may even be slower than they think they will be to cut rates. Inflation has just proven to be a little stickier.
— Greg McBride, CFA | Bankrate chief financial analyst

1. Inflation isn’t slowing as fast as it was in 2023

Inflation slowed more dramatically than any official expected in 2023, sinking 3 full percentage points by the time the calendar year came to a close. Improving supply chains aided the decline, illustrated by falling gasoline, household utilities and used car prices.

That progress, however, might be stalling.

Consumer prices in February rose 3.2 percent from a year ago, matching levels from October and topping forecasts for the second month, Bureau of Labor Statistics data shows. A spike in gasoline costs contributed to inflation’s stubbornness, while key household essentials from housing and apparel to vehicle insurance and repairs continued to rise at an outsized pace compared to before the pandemic.

Excluding food and energy, prices are up 3.8 percent from a year ago, data also shows. Fed officials consider that gauge a better indicator of underlying inflation — and if the trends of the past three months were to persist for a full year, core prices would heat up to 4.1 percent.

Interrupting that progress is resilient demand underpinned by historically low unemployment. Services — a category less tied to supply chains and more so linked to consumer spending — are up a hotter 5 percent from a year ago.

“There was just this level of complacency in the marketplace that inflation would continue on this orderly retreat back to 2 percent, easy does it, nice and clean. That’s just not the nature of inflation,” says Lindsey Piegza, chief economist at Stifel Financial. “They need to slow the economy significantly more than they have in order to get inflation back to 2 percent.”

What voting Fed officials are saying about rate cuts

The path to price stability is not a straight line. I need to see more progress to feel fully confident that inflation is on a sure path to averaging 2 percent over time.
— Raphael Bostic, Atlanta Fed President

There is no imminent risk to the economy faltering. We are ready to make moves and adjust as the data demands us to do.
— Mary Daly, San Francisco Fed President

If the economy evolves as expected, I think we will gain that confidence later this year, and then we can begin moving rates down.
— Loretta Mester, Cleveland Fed President

2. Fed officials will update consumers and investors on how many rate cuts they’re expecting

Officials are bound to agree that the reports underline their caution with rate cuts. Yet, the Fed targets a different index — one that doesn’t place as much weight on shelter. The Fed’s preferred personal consumption expenditures (PCE) index has thus improved much faster.

Ask the Fed itself, and officials probably never saw themselves cutting interest rates as early as March. At the Fed’s post-meeting press conference, Fed Chair Jerome Powell said that a March rate hike wasn’t on the table.

“Whether inflation has been because of supply or demand, I don’t think they want to take the risk of having another narrative that they cut too soon again,” says Ricardo De la O, assistant professor of financial and business economics at the University of Southern California. “The downside of cutting rates is salient, and the upside of cutting rates is not as clear.”

Yet, even after seeing one month of hotter-than-expected inflation, Powell said during a March congressional testimony that officials were close to getting the confidence they need to begin to cut interest rates, even if they’re not there yet.

For now, it appears that only investors’ expectations have been recalibrated thanks to a string of strong economic data. Investors currently see just three rate cuts for the year after expecting as many as seven nearly two months ago.

But a key question is whether Fed officials are also going to pull back on the number of rate cuts they’re expecting. Piegza says she wouldn’t be surprised to see wider dispersion that could bring the median Fed projection down from three cuts for the year to just two.

Giving Fed watchers the information they’re looking for, officials will update their projections on the U.S. economy and interest rates through 2026.

“The same investors hoping for seven rate cuts were also expecting S&P 500 earnings to rise 11 percent. You’re not getting both,” McBride says. “This idea of seven rate cuts, starting as soon as March, always seemed like fantasy land.”

3. The Fed may start to rethink whether it can defeat inflation without slowing the economy

Powell & Co. kicked off their fastest tightening cycle in 40 years with the assumption that below-trend growth would be necessary to bring inflation back down. Yet, month after month, inflation slowed, while the job market and growth remained resilient.

A year ago, Fed officials said that they expected the U.S. economy to expand a measly 0.4 percent. Instead, the U.S. economy topped forecasts in both the third and fourth quarters, thanks to robust consumer spending.

Economists have long warned that growth will likely cool this year, as consumers take on more debt, draw down on their pandemic-era savings and feel the pinch of high interest rates. Yet, even the Atlanta Fed’s GDPNow tracker estimates that the U.S. economy will grow 2.3 percent in the first quarter of the year.

“This makes the Fed’s job of ‘wait and see’ easier,” De la O says. “They aren’t receiving the pressure of a weak labor market that tells them you need to cut rates now.”

Breaking down the Fed’s December 2023 projections

  • 17 Fed officials projected at least one rate cut for 2024
  • Six officials projected three rate cuts
  • One official penciled in six cuts
  • Unemployment rate by year-end: 4.1%
  • Inflation: 2.4%

Sticky inflation, however, puts the Fed in a holding pattern, with no reason to rush rates in either direction. With supply improvements likely helping the Fed succeed in bringing inflation down thus far, monetary policy might have to do the trick for the rest of the way.

“Unless we see a meaningful back-up in inflation, not just a lack of improvement, the Fed is indefinitely on the sidelines,” Piegza says.

What the Fed’s next announcement means for you

Higher rates for longer means it’s an important time for consumers to craft a debt payoff plan, work on boosting their credit score and find the best place to park their cash.

  • Balance-transfer cards are currently offering consumers the opportunity to pay down their debt with a 0 percent introductory annual percentage rate (APR) for as many as 21 months, according to Bankrate’s latest rankings. The tool can help you significantly speed up your debt payoff plan, a crucial path with credit card rates hovering at record highs since last fall.
  • The top-yielding online bank is offering a 5.35 percent annual percentage yield (APY), according to Bankrate’s rankings for March. That translates to earnings of $53.50 in a year, if you were to deposit just $1,000 into your account.
  • Consumers may also have more time to lock in a longer-term certificate of deposit (CD). Yields are already beginning to drift lower, though they’re still higher than at any point in the past decade. If you already have between three to six months of savings in an emergency fund, adding a 2-year or 5-year CD to your portfolio could help you continue to take advantage of one of the clear benefits of higher rates.

“Interest rates took the elevator up, but they’re going to take the stairs coming down. That credit card debt you have — continue to attack that aggressively. The cost of that debt is not going to come down anytime soon,” McBride says. “Don’t hang your hopes on falling interest rates to bail you out.”

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