Fed expected to keep interest rates at their highest level since 2001

The Federal Reserve is expected to announce its decision on Wednesday on whether to adjust its benchmark interest rate, just days after new government data showed the economy was slowing.

The slowdown coincided with a period of stubborn inflation that lasted several months, putting pressure on the Fed to keep interest rates high despite the risk of hampering economic activity with higher borrowing costs. students.

Most economists expect the Fed to leave interest rates unchanged. Such a move would postpone rate cuts the central bank expects to make this year.

At its last meeting in March, the Fed stuck to its previous forecast of three rate cuts by the end of 2024, although it opted to keep interest rates steady for the fifth time in a row.

The approach amounts to a prolonged pause in the aggressive rate-hiking cycle that began about two years ago, when the central bank sought to rein in rapidly rising prices.

Inflation has fallen significantly since its peak of 9.1%, but remains more than a percentage point above the Fed’s 2% target rate.

Interest rate cuts would lower borrowing costs for consumers and businesses, potentially triggering a burst of economic activity through increased household spending and business investment.

But the Fed risks a rebound in inflation if it cuts interest rates too quickly, as stronger consumer demand combined with strong economic activity could lead to an acceleration in price increases.

At the same time, the recent economic slowdown could complicate the position taken by the Fed.

The U.S. economy slowed significantly in early 2024, although it continued to grow at a solid pace, according to data released last week by the U.S. Commerce Department.

Gross domestic product, a measure of all goods and services produced in the economy, grew 1.6% annually in the first three months of the year, the Commerce Department said this week.

This figure is well below expectations, marking a sharp slowdown from the 3.4% annual rate measured during the final quarter of last year.

In March, before the latest GDP data, Fed Chairman Jerome Powell said a combination of high inflation and economic fortitude gave the Fed an opportunity to keep rates steady at very low levels. high, as the central bank faced little immediate risk of triggering a slowdown.

“When it comes to inflation, it’s too early to say whether the recent numbers represent more than just an increase,” Powell said at a business conference at Stanford University.

“Given the strength of the economy and the progress on inflation so far, we have time to let the incoming data guide our policy decisions,” Powell added.

Economists who recently spoke to ABC News downplayed any concerns over last week’s GDP results, saying the resilience of consumer spending continues to propel steady growth.

But, they added, the Fed could find itself in a difficult position if a gradual slowdown persists alongside high inflation. This trend could force the Federal Reserve to keep interest rates high even as the economy falters.

The Fed Funds rate is between 5.25% and 5.5%, its highest level since 2001.