The Federal Reserve is on the brink of announcing its decision on Wednesday regarding whether to adjust its benchmark interest rate, following recent government data indicating a slowdown in the economy.
This deceleration has coincided with persistent inflation over several months, compelling the Fed to consider maintaining high interest rates despite the potential to impede economic activity due to costly borrowing. Most economists anticipate that the Fed will maintain its current interest rates, delaying any rate cuts anticipated later this year.
During its most recent meeting in March, the Fed reaffirmed its projection of three rate cuts by the end of 2024 while choosing to keep interest rates steady for the fifth consecutive meeting. This approach represents a prolonged pause in the aggressive rate-hiking cycle that commenced about two years ago, aimed at curbing rapid price hikes.
Although inflation has decreased significantly from its peak of 9.1%, it remains over a percentage point higher than the Fed's target rate of 2%.
Lowering interest rates would reduce borrowing costs for consumers and businesses, potentially stimulating economic activity through increased household spending and corporate investment. However, the Fed risks a resurgence of inflation if it cuts rates too swiftly, as heightened consumer demand alongside solid economic activity could accelerate price increases.
The recent economic slowdown could further complicate the Fed's stance. The U.S. economy slowed considerably at the beginning of 2024, albeit maintaining a solid growth pace, according to recent data from the U.S. Commerce Department.
The Commerce Department reported 1.6% annual growth in gross domestic product (GDP) for the first three months of the year, significantly below expectations and a sharp slowdown from the 3.4% annual rate observed in the final quarter of the previous year. In March, prior to the latest GDP data release, Fed Chair Jerome Powell noted that elevated inflation and economic resilience provided an opportunity to maintain rates at highly elevated levels, as there was little immediate risk of triggering a downturn.
However, Powell added that if a gradual cooling of the economy persisted alongside elevated inflation, the Fed could find itself in a challenging position, potentially needing to keep interest rates high even as the economy weakened.
The Fed Funds rate currently ranges between 5.25% and 5.5%, matching its highest level since 2001.