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The Fed is still on track to cut interest rates this year, but not yet

AILSA CHANG, HOST:

The Fed is still on track to cut interest rates this year, but not today. For now, rates are staying where they have been since last summer, and that is high. Nevertheless, the stock market rallied on signals that the central bank still expects to lower rates later this year. NPR's Scott Horsley joins us now to explain. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: OK, so yet another meeting with no change in the interest rate. What's the Fed thinking here?

HORSLEY: They are still in wait and see mode. Now, it's no surprise the Fed kept interest rates steady today. They telegraphed that pretty clearly. All the drama was around the forecast of what might happen with rates in the future. There had been some fear the Fed might back away from expected rate cuts after a couple of months in which inflation came in hotter than expected. That didn't happen, though. Updated forecasts from members of the Fed's rate setting committee show that, on average, they still think they're going to be able to cut rates by a quarter percentage point three times this year, about the same as what they were projecting back in December. Fed Chairman Jerome Powell says he and his colleagues still feel pretty confident, and they haven't gotten spooked by those slightly higher inflation readings for January and February.

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JEROME POWELL: I don't think we really know whether this is a bump on the road or something more. We'll have to find out.

HORSLEY: Fed policymakers did make a few other tweaks to their forecasts. On average, they now expect somewhat stronger economic growth this year and somewhat lower unemployment than they were projecting three months ago.

CHANG: OK, not bad. And the stock market seemed pretty happy about all this, right?

HORSLEY: Yeah, I think you heard a big sigh of relief on Wall Street that the Fed is not walking away from rate cuts. All the major stock indexes closed today at record highs, with the Dow Jones Industrial Average jumping 400 points or about 1%. The timing of any rate cuts, though, is still uncertain. Markets see a slim chance of a cut at the next Fed meeting in May, but a pretty good chance rates will start to come down in June. Powell says he and his colleagues are trying to strike a balance here.

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POWELL: If we ease too much or too soon, we could see inflation come back. And if we ease too late, we could do unnecessary harm to employment and, you know, people's working lives. And so we want to be careful. And fortunately, with the economy growing, with the labor market strong and with inflation coming down, we can approach that question carefully.

HORSLEY: Fed officials are keeping an eye out for any further uptick in prices or any softening in the job market. So far, though, the economy's weathered this high interest rate period pretty well. Employers have added about a quarter million jobs in each of the last three months, and the unemployment rate has now been below 4% for more than two full years.

CHANG: But are there any areas where higher borrowing costs are actually hurting the economy?

HORSLEY: Definitely. You can see this most clearly in the housing market. Higher mortgage rates have priced a lot of would-be buyers out of the market and also kept a lot of would-be sellers from trading up, since that would mean giving up their own lower-cost mortgages. Last year, as a result, home sales fell to their lowest level since 1995.

CHANG: Wow.

HORSLEY: Higher rates are also making it more expensive to expand businesses and retail sales have down shifted a bit in recent months, which may suggest some consumers are feeling tapped out. You know, credit card debt topped $1.1 trillion last year, and the number of cardholders who are behind on their payments is now higher than it was before the pandemic.

CHANG: Geez, this all sounds pretty dire. Is the Fed getting any pressure to cut rates more quickly than?

HORSLEY: They are. To give you just one example, Senators Elizabeth Warren and Sheldon Whitehouse wrote a letter to the Fed complaining that these high interest rates are making it more expensive to invest in green energy projects. Now, Powell says he and his colleagues always try to be respectful of that kind of congressional input, but he also said the Fed is laser focused on its own mission, which is stable prices and maximum employment. And he stressed they're going to stick to their knitting.

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POWELL: That's how we can best serve the public and leave the other issues, which in many cases are incredibly important, leave those to the people who have responsibility for those.

HORSLEY: That won't be easy, though. In this election year, the Fed is likely to face mounting pressure either to goose the economy, which might help the incumbent president, or keep its foot on the brakes, which might help the challenger. Powell has jealously guarded the Fed's independence to set monetary policy free from political interference, but he may have to sharpen those knitting needles.

CHANG: That is NPR's Scott Horsley. Thank you so much, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.