Federal Reserve is likely to show little urgency to cut interest rates despite market's anticipation

The Federal Reserve will likely move closer Wednesday to cutting its key interest rate after nearly two years of hikes that were intended to fight the worst inflation in decades

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The Federal Reserve will likely move closer Wednesday to cutting its key interest rate after nearly two years of hikes that were intended to fight the worst inflation in decades. Yet it may not provide much of a hint about when — or how fast — it will do so.

Though Fed officials are expected to cut rates within the next few months, they’ll likely signal Wednesday that they expect to wait until they’re confident that inflation, which has tumbled from its peak, is reliably moving to their 2% target. The central bank's benchmark rate influences the cost of most consumer and business loans, and companies, investors and individuals have been eager for the central bank to ease the cost of borrowing.

The Fed is assessing the economy at a time when the intensifying presidential race is pivoting in no small part on voters' perceptions of President Joe Biden's economic stewardship. Republicans in Congress have tried to tie Biden to the high inflation that gripped the nation beginning in 2021. But the most recent surveys indicate rising confidence in the economy.

Most Fed watchers think the central bank's first rate reduction will occur in May or June. Late last year, Wall Street investors had bet that a rate cut in March was a near-certainty. But cautionary comments by a number of Fed officials have dispelled most expectations for a cut that soon.

Collectively, the policymakers likely feel little urgency to start cutting rates, a point that Chair Jerome Powell may stress in a news conference Wednesday. The economy remains healthy and doesn't appear to need the stimulative benefits of a rate cut, which can spur more borrowing and spending and could even re-ignite inflation.

In addition, the stock market is near a record high, and the yield on the influential 10-year Treasury note, at just above 4%, is well below its peak of nearly 5% last fall. Average long-term mortgage rates, which typically track the 10-year yield, have dropped from nearly 8% to about 6.7%.

“The Fed’s probably thinking they’re not really in any rush, there’s no need to really rush into cutting rates,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale, a French bank. “That's why the markets started to question the March rate cut.”

The economy expanded faster than expected in the final three months of the year, the government said last week. Its report showed that growth reached a surprisingly strong 3.3% annual rate, far higher than expected, after a 4.9% pace of expansion in the July-September quarter.

Consumers powered much of last quarter's growth, with Americans opening their wallets for holiday shopping and spending freely on such major purchases as cars, appliances and furniture. That spending is benefiting companies like General Motors, which reported Tuesday that its revenue grew 10% last year and that it made $10 billion in profit despite a six-week strike by the United Auto Workers union.

Public sentiment has also improved. Consumer confidence rose in January for a third straight month, according to the Conference Board, a business research group, to the highest level in two years. Growth has been robust even as inflation has sunk ever closer to the Fed's 2% target.

Measured over the past six months, in fact, inflation excluding volatile food and energy costs has slowed to a 1.9% annual rate, according to the Fed's preferred inflation measure. Compared with a year earlier, overall prices rose 2.6% in December.

A year ago, many analysts were predicting that widespread layoffs and sharply higher unemployment would be needed to cool the economy and curb inflation. Yet solid hiring has persisted. The unemployment rate, at 3.7%, isn't far above a half-century low.

Yet some cracks have begun to appear in the job market and, if they worsen, could spur the Fed to cut rates more quickly. For several months, for example, most of the job growth has occurred in just a few sectors — health care, government and hotels, restaurants and entertainment. Any weakening in those areas of the economy could threaten hiring and the overall expansion.

And a report Tuesday showed that the number of workers who quit in December reached its lowest level in three years. That suggested that fewer Americans are being recruited for new, higher-paying jobs or are willing to search for and take new positions. Though quits remain at a level consistent with a solid job market, they have fallen about one-third from their peak in mid-2022.

Still, the U.S. economy is outpacing its counterparts overseas. During the October-December quarter, the 20 countries that share the euro currency barely avoided a recession, posting essentially no growth. Still, as in the United States, unemployment is very low in the euro area, and inflation has slowed to a 2.9% annual rate. Though the European Central Bank could cut rates as soon as April, many economists think that might not happen until June.