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The Fed keeps interest rates on hold — and signals cuts aren’t coming soon

<i>Samuel Corum/Bloomberg/Getty Images</i><br/>
Samuel Corum/Bloomberg/Getty Images

By Bryan Mena, CNN

Washington, DC (CNN) — The Federal Reserve held interest rates steady Wednesday for the fourth straight meeting, keeping its benchmark lending rate at a 23-year high, as Wall Street eagerly awaits rate cuts sometime this year.

The central bank has raised rates 11 times since March 2022 in a bid to combat the fastest inflation in decades. 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 released Wednesday 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 percent,” the statement read.

That’s the Fed’s latest attempt at giving Wall Street a reality check on rate cuts.

When will rate cutting start?

Fed officials have been communicating that sentiment for weeks now, and Wednesday’s statement is yet another signal from the Fed that investors need to rethink their bets. Wall Street has slowly come to grips with the Fed’s guidance. In early January, futures showed that rate cuts were very likely going to happen in March, but those odds have since crumbled, and they may continue to dip.

Generally, a rapidly weakening economy threatening job losses is an obvious reason why the Fed would begin to cut rates, but the economy remains in good shape with unemployment low and economic growth in positive territory. Inflation also hasn’t reached the Fed’s 2% target just yet and the latest policy statement kept a usual phrase stating that it “remains elevated.”

That’s the big question the Fed is currently contending with: When is the right time to begin cutting interest rates? There are consequences if the Fed cuts rates too soon and if it cuts too late.

Fed Chair Jerome Powell has 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. Officials are also considering the effects of rising “real” interest rates, which comes about when inflation descends, but interest rates remain elevated, unnecessarily squeezing the economy and risking job losses. In addition to stabilizing prices, the Fed is also responsible for maximizing employment, and the stakes are high because the central bank is also on the cusp of defeating inflation without a spike in unemployment, an extremely rare outcome known as a soft landing.

The Fed is doing a difficult balancing act of weighing the risk that inflation’s slowdown could stall, or even reignite, with the risk that the Fed’s previous 11 rate hikes could inadvertently weigh too much on the economy, pushing up unemployment.

Those risks are have been “moving into better balance,” according to Wednesday’s statement.

“We seem to be heading towards a soft landing scenario,” Subadra Rajappa, head of US rates strategy at Société Générale, told CNN. “But the market has priced in 150 basis points of cuts, which has led to this significant easing of financial conditions and that could potentially delay the timing of any sort of monetary policy normalization.”

Watching for ‘below-trend growth’

While it seems like Fed officials are not leaning toward cutting rates in March, the first rate cut could be delayed even further through a combination of easing financial conditions, stronger-than-expected economic data and most importantly, signs that inflation is no longer cooling.

Fed officials have said they likely need to see “below-trend growth” to be assured that inflation is on its way to 2%. Economists and officials have attributed inflation’s slowdown in recent years to supply-side developments, such as improving supply chains.

That means the final mile of the Fed’s historic inflation would have to be helped along by waning demand, which is still going strong. The US economy expanded at a seasonally and inflation-adjusted 3.3% annualized rate in the fourth quarter, capping a year of healthy economic growth. Similarly, the job market is still humming along with the unemployment rate at a low 3.7%. Slower growth and hiring would likely help with bringing inflation down further.

In a separate statement, the Fed also reaffirmed its commitment to its dual mandate of stabilizing prices and maximizing employment.

This story has been updated with additional developments and context.

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