Updated January 31, 2024 at 5:33 PM ET

The Federal Reserve held interest rates steady on Wednesday but signaled that rates could fall in the coming months if inflation continues to cool.

Policy makers have kept their benchmark interest rate between 5.25% and 5.5% — the highest in over two decades — since July.

Fed chairman Jerome Powell told reporters Wednesday that interest rates are unlikely to go any higher, and that he and his colleagues are beginning to contemplate cutting rates.

"If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," Powell said.

He cautioned, however, that the economy remains unpredictable and said the central bank would proceed cautiously.

"The economic outlook is uncertain and we remain highly attentive to inflation risks," Powell said.

The Fed has been pleasantly surprised by the rapid drop in inflation in recent months. Core prices in December — which exclude food and energy prices — were up just 2.9% from a year ago, according to the Fed's preferred inflation yardstick. That's a smaller increase than the 3.2% core inflation rate that Fed officials had projected in December.

If that positive trend continues, the Fed may be able to start cutting interest rates as early as this spring. First, though, Powell said he and his colleagues will need to see additional evidence that inflation is easing.

And he sounded doubtful about a rate cut at the Fed's next meeting in March as many investors in Wall Street had hoped for.

"Based on the meeting today, I would tell you that I don't think it's likely the committee will reach a level of confidence by the time of the March meeting," Powell said. "But that's to be seen."

The comments disappointed investors, with the Dow Jones Industrial Average tumbling 317 points.

Investors are still hopeful about a rate cut by the following Fed meeting in May, with markets putting the likelihood of that at better than 90%.

Good omens in the economy

Both the economy and the job market have performed better than expected over the last year, despite the highest interest rates since 2001. The nation's gross domestic product grew 3.1% in 2023, while employers added 2.7 million jobs

Unemployment has been under 4% for nearly two years. And average wages in December were up 4.1% from a year ago.

While that strong economy is welcome news for businesses and workers, it also raises the risk of reigniting inflation. As a result, Fed policymakers say they'll be cautious not to cut interest rates prematurely.

"We have history on this," Atlanta Fed president Raphael Bostic told the Rotary Club of Atlanta this month. "In the '70s, the Fed started removing accommodation too soon. Inflation spiked back up. Then we had to tighten. Inflation came down. Then we removed it again. Inflation went back up. And by the time we were done with that, all Americans could think about was inflation."

The Fed is determined not to repeat that '70s show. At the same time, waiting too long to cut interest rates risks slowing the economy more than necessary to bring inflation under control.

A report from the Labor Department Wednesday showed employers' cost for labor rose more slowly than expected in the final months of last year. Labor costs increased just 0.9% in the fourth quarter. That's a smaller increase than the previous quarter, suggesting labor costs are putting less upward pressure on prices.

Fed officials promised to keep an eye on upcoming economic data and adjust accordingly.

Copyright 2024 NPR. To see more, visit https://www.npr.org.



After almost two years of raising interest rates to their highest level in more than two decades, the Federal Reserve could soon be ready to start cutting rates, but the nation's central bank did not take that step today. If inflation continues to moderate, families and businesses could see lower borrowing costs sometime this spring. NPR's Scott Horsley is here to explain. Hey, Scott.


SHAPIRO: We've seen encouraging numbers on inflation recently, so why isn't the Fed ready to declare mission accomplished and start lowering rates?

HORSLEY: You know, the Fed is trying to strike a balance. It doesn't want to cut interest rates too quickly and run the risk of reigniting inflation. But it also doesn't want to wait too long and cause the economy to slow down more than necessary. We have seen better progress on inflation than the Fed expected in recent months. But it's been such an unpredictable ride over the last few years, and the Fed has been burned in the past when the economy didn't behave the way they thought it was going to. So Fed Chairman Jerome Powell says he and his colleagues are just going to need some more time before they feel confident that inflation is really under control.


JEROME POWELL: What do we want to see? We want to see more good data. It's not that we're looking for better data, it's that we're looking at continuation of the good data that we've been seeing.

HORSLEY: For example, a lot of the drop in inflation so far has come on the good side, which is mainly thanks to untangling supply chains that were tied in knots during the pandemic. In order to make additional progress on inflation, we're probably going to need to see moderating prices on the services side, things like car repair and restaurant meals, and that's not guaranteed. So the trend is encouraging, but we're not across the finish line just yet.

SHAPIRO: Well, when would you expect the Fed to start cutting rates?

HORSLEY: The next time Fed policymakers get together is in March. And this morning investors were betting there was at least a 50-50 chance we would see a rate cut at that March meeting. Powell poured some cold water on that idea this afternoon, although he didn't completely rule it out. We're only going to get one more month's report card on inflation between now and that March meeting, and the Fed chairman says that's probably not going to be enough for policymakers to tee up their first rate cut.


POWELL: We're going to be looking at this meeting by meeting. Based on the meeting today, I would tell you that I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that, but that's to be seen.

HORSLEY: The stock market was not too happy about the idea of having to wait longer for a rate cut. The Dow tumbled more than 300 points. Investors are still betting, though, we'll see a rate cut by May. And that would be encouraging for anyone trying to get a car loan or borrow money for a business or just carrying a balance on their credit card.

SHAPIRO: It's an election year, to state the obvious, and the Fed is starting to get some political pressure. How are Powell and his colleagues dealing with that?

HORSLEY: Yeah, politicians are starting to weigh in on both sides. We've had Democratic lawmakers urging the Fed to cut rates more quickly in hopes that'll boost the economy and maybe give a lift to President Biden's reelection chances. We've also seen conservative commentators urging the Fed to go slow, in hopes a weaker economy might give an edge to Donald Trump. Powell was asked about those political crosswinds today, and he basically pledged that he and his colleagues are going to tune that out and just do their job.


POWELL: The job Congress has given us is price stability and maximum employment. Price stability is absolutely essential for people's lives, most importantly for people at the lower end of the income spectrum who are living at the edges.

HORSLEY: Powell has shown in the past he's able to stand up to political pressure. And that's important because a Fed that gives in to that kind of pressure is generally not helpful for the economy or people's pocketbooks.

SHAPIRO: NPR's Scott Horsley. Thank you.

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

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