WASHINGTON--The Federal Reserve left its key interest rate unchanged again Wednesday and stuck to its forecast of three rate cuts this year despite signs that inflation may stay elevated longer.
Fed officials also bumped up their estimates of economic growth and inflation in 2024.
The decision leaves the Fed’s benchmark short-term rate at a 23-year high of 5.25% to 5.5% for a fifth straight meeting. After hiking the rate from near zero since March 2022 to wrestle down high inflation, the central bank has stood pat since July as consumer price increases moderated substantially.
Wednesday’s move means Americans will keep paying higher borrowing costs for now as the Fed battles to slow sharp price increases.
In a statement after a two-day meeting, the Fed repeated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation (now close to 3%) is moving sustainably toward” the Fed’s 2% goal.
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While inflation has eased more slowly early this year, Fed officials maintained their projection that they’ll lower the federal funds rate by three-quarters of a percentage point to a range of 4.5% to 4.75% by year’s end, according to their median estimate. That’s equivalent to three quarter-point rate cuts, an outlook that could further bolster a stock market that has hit new records since fall on the prospect of lower rates.
At a news conference, Fed Chair Jerome Powell acknowledged that inflation flared in early 2024 after falling dramatically last year. But he said the uptick in January could have been caused by challenges the government faces as it seasonally adjusts the data. The February data was more worrisome, he said, but it appeared to show less of a spike than the previous month.
"The story is really essentially the same of inflation coming down gradually to 2% on a sometimes bumpy path," Powell said. "We're not going to overreact...to the two months of data. Nor are we going to ignore them."
Powell wasn't more specific on when the Fed could start shaving rates except to reiterate that it likely will be "sometimes this year." He noted, however, that besides further progress on inflation, Fed officials also could lower rates "if there's a significant weakening in the labor market."
Futures markets continue to predict three rate decreases this year, with the first coming in June.
Some economists believe the Fed will slice rates more sharply this year in response to both a softening economy and slowing inflation.
"We continue to believe that below-potential GDP growth will help to drive core inflation much closer to the 2% target by year-end, persuading the Fed to cut rates by (a full percentage point), beginning in June," Paul Ashworth of Capital Economics wrote in a note to clients..
Fed officials did reduce their forecast to just three rate cuts in 2025 from four in December. And they nudged up their estimate of the longer-run rate intended to neither stimulate nor curb growth to 2.6% from 2.5%, indicating they believe the economy will be a bit stronger than anticipated in coming years.
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The Fed raises rates to make consumer and business borrowing more expensive in an effort to curtail economic activity and inflation. It lowers rates to stimulate weak growth or dig the economy out of recession. Wednesday’s decision means consumers will continue to endure higher borrowing costs for mortgages, credit cards, auto and other loans but will also benefit from higher savings account yields.
Some Fed officials say they can afford to trim rates cautiously because the economy has been resilient despite the high borrowing costs and inflation is still above their goal. Others note that with price gains generally slowing, inflation-adjusted rates are already too high and serve as a drag on an economy that’s poised to lose steam after a post-COVID surge.
Some forecasters still think the U.S. could slip into a mild recession this year, an outcome they say would become more likely if the Fed waits too long to chop rates.
On Wednesday, the Fed said it expects the economy to grow 2.1% in 2024, well above its prior 1.4% estimate. It predicts 2% growth in 2025, up from its prior 1.8% projection.
The economy grew a sturdy 3.1% in 2023 (as measured from the fourth quarter of 2022 to the fourth quarter of 2023). But it’s projected to slow this year as high interest rates, record credit card debt and dwindling COVID-related savings take a bigger toll on household spending. Retail sales were feeble in January and February.
Stubborn inflation:Inflation data from CPI report shows sharper price gains.
Fed officials estimate their preferred measure of annual inflation, the personal consumption expenditures (PCE) index, will end 2024 at its current level. 2.4%, in line with their previous projection.
But a core measure that strips out volatile food and energy items and is watched more closely by the Fed is expected to dip from 2.8% to 2.6% by the end of the year, above the prior 2.4% estimate.
After hitting a 40-year high of 7% in mid-2022, the PCE price index has tumbled. Economists point to the resolution of product and labor shortages as Americans idled by COVID came back to the labor force, joining a stream of immigrants. Also, consumer demand for furniture and other goods has softened as the health crisis has faded.
But in January, consumer prices rose 0.3% and a core measure both jumped 0.4%, higher than the previous trend. The increases still lowered annual inflation overall to 2.4% and core PCE to 2.8%.
In February, though, a different inflation gauge, the consumer price index (CPI), along with core CPI, both rose 0.4%, according to a report last week. The cost of services such as rent, auto insurance, car repairs and airline fares continued to climb. And prices for goods that had been falling or rising modestly, such as used cars and clothing, drifted higher.
Economists are divided over whether the high inflation readings amount to a blip or a sign that the road to the Fed’s 2% target is becoming bumpier. Barclays economist Jonathan Millar believes the fall in goods prices may have petered out. And annual wage growth, which was propelled higher by pandemic-related worker shortages, could decline just gradually, leaving services inflation elevated, he says.
Gregory Daco, chief economist of EY-Parthenon, says the inflation readings for the past two months have been distorted by volatile items such as airfares. And, he says, pay increases should continue to slow steadily, bringing inflation close to the Fed’s 2% target by year’s end.
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The 3.9% unemployment rate is projected to end 2024 at 4%, a bit lower than the December forecast, the Fed’s median estimate shows. Average monthly job growth has downshifted from about 300,000 in early 2023 to a still robust 264,000 the past three months. But average job gains are likely to slow to less than 100,000 by mid-year, according to Moody’s Analytics.
Meanwhile, average yearly wage gains have declined to 4.3% from 5.9% since March 2022. The Fed wants pay increases to come down to 3.5% to align with its 2% inflation target.
For more answers to your questions about today's interest rate decision and its impact, keep reading:
The Fed’s cautious approach illustrates what’s unusual about this round of potential rate cuts.
Vincent Reinhart, chief economist at Dreyfus-Mellon and a former Fed economist, notes that the Fed typically cuts rates quickly as the economy deteriorates in an often-futile effort to prevent a recession.
But this time, the economy is still healthy. The Fed is considering rate cuts only because inflation has steadily fallen from a peak of 9.1% in June 2022. As a result, it is approaching rate cuts the way it usually does rate hikes: Slowly and methodically while trying to divine the economy’s direction from often-conflicting data.
“The Fed is driving events, not events driving the Fed,” Reinhart said. “That’s why this task is different than others.”
- Associated Press
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Like the Fed, other major central banks are keeping rates high to ensure that they have a firm handle on consumer price spikes. In Europe, pressure is building to lower borrowing costs as inflation drops and economic growth has stalled, unlike in the United States. The European Central Bank’s leader hinted this month that a possible rate cut wouldn’t come until June, while the Bank of England isn’t expected to open the door to any imminent cut at its meeting Thursday.
- Associated Press
During the last Federal Reserve meeting in January, the Fed underscored that an interest rate cut was now far more likely than a hike. But the central bank also suggested that it’s in no rush to reduce rates and wants to make sure inflation has been subdued for the long term before acting.
"The timing of (the first rate decrease) is linked to our gaining confidence that inflation is on a sustainable path down to 2%," Powell said at a January news conference. "I don't think it is likely (Fed officials) will reach that level of confidence by the time of the March meeting. It's probably not the most likely case."
- Paul Davidson, Daniel de Visé, Medora Lee, Charisse Jones and Bailey Schulz
The Federal Reserve is an “independent government agency.” It does not get funding through Congress. Rather, its income is primarily based on interest from the government securities it owns.
- Bailey Schulz
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- USA TODAY/Blueprint
The federal funds rate is what banks pay each other to borrow overnight. If that rate increases, banks usually pass along that extra cost, meaning it becomes more expensive for consumers and businesses to borrow as rates rise on credit cards, adjustable-rate mortgages and other loans. That’s why the funds rate is the key mechanism used by the Federal Reserve to calm inflation.
Simply put, companies and consumers don’t borrow as much when loans cost them more, and that means an overheated economy can cool and inflation may dip.
- USA TODAY Staff
In February, the Labor Department’s consumer price index (CPI) – a measure of the average shift in prices for a basket of different products and services – was up 3.2% from a year earlier, a slightly larger annual increase than the month before.
Annual inflation is down dramatically from 9.1% in June 2022, which marked a 40-year high. But it remains above the 2% target the Fed equates with price stability.
- USA TODAY Staff
The Federal Reserve watches two key aspects of the economy, price stability and maximum employment, and those are the main factors it takes into account for its interest rate decisions. The CPI is one key measure the Fed looks at to help determine if prices are “stable.’’ It traditionally has watched PCE prices even more closely.
- USA TODAY Staff
Core prices don’t include the volatile costs of food and energy items, giving a more accurate gauge of longer-term trends.
- USA TODAY Staff
Now that inflation is easing, the Fed may be poised to make a blunder by moving too slowly to cut rates and triggering a recession, some economists argue.
“The longer they wait, the greater the risk that something goes off the rails,” says Mark Zandi, chief economist of Moody’s Analytics.
Other economists say inflation still poses the bigger threat and the Fed is on the right track.
- Paul Davidson
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- USA TODAY/Blueprint
The Fed doesn’t directly dictate how much interest you pay on your credit card debt. But its rate is the basis for your bank’s prime rate. In combination with other factors, such as your credit score, the prime rate helps determine the Annual Percentage Rate, or APR, on your credit card.
Credit card annual percentage rates (APRs), or the annual interest rates you pay to borrow money, will likely continue climbing. The average credit card interest rate is 24.66%, the highest since LendingTree began tracking rates monthly in 2019, it said.
“We’ll likely see more record credit card APRs in the short term, with rates for those who don’t have perfect credit perhaps climbing the most,” said Matt Schulz, credit analyst at comparison site LendingTree. “I expect the increases to be pretty small, barring unexpectedly bad economic news, but after two years of upward movement, even tiny increases are definitely unwelcome.”
With interest rates so high, Americans should focus on paying off credit card debt before anything else. “You can’t outrun 20-plus-percent interest rate on a balance,” said Rich Guerrini, president and chief executive at financial services company PNC Investments.
Since it’s tax season, consider using your refund check to pay off credit card debt, he said. As of March 8, the average refund was $3,145, up 5.8% from a year ago, the IRS said. “Use it to pay your credit card bill instead of a trip,” Guerrini said.
Credit card debt was a record $1.13 trillion in the last three months of 2023 and delinquencies have risen above pre-pandemic levels, the New York Federal Reserve said.
- Associated Press, Medora Lee
Borrowers’ rates are based on factors like credit background, vehicle price, down payment and the lenders’ borrowing costs and risks.
But rates alone have “a pretty limited impact on affordability,” said Greg McBride, chief financial analyst at personal finance site Bankrate. “For most auto buyers, it’s not the interest rate that’s busting the budget...The difference between 8% and 7.25% on a $40,000 loan is about $14 per month – on an $800 per month loan.”
Instead, it’s price. The average new vehicle transaction price remains 18% higher than pre-pandemic, Kelley Blue Book said.
- Medora Lee
Rates have already begun to fall in anticipation of a rate cut later this year, said Ken Tumin, banking expert at DepositAccounts.com, which tracks interest rate products.
Certificates of Deposit (CD) rates have led the decline, with some banks having already slashed their 12-month online CD rate by more than half a percentage point this year, he said.
Online savings accounts have fared better, with rates holding mostly steady or just dipping.
“Widespread cuts in online savings account rates are unlikely until the first Fed rate cut is near,” Tumin said. So far in 2024, the average yield has declined 5 basis points from 4.49% to 4.44%, he said.
- Medora Lee
The average yield on a one-year certificate of deposit (CD) in December 2023 was 1.86%, according to the Federal Deposit Insurance Corporation (FDIC), while a 60-month CD was 1.40%.
While those rates aren’t exactly robust, they’re well above recent levels. For instance, a one-year CD yielded just 0.13% in January 2022, before the Fed started raising rates, while a 60-month CD offered only 0.28%.
A rate increase of that size can make a big difference to your bottom line.
Say you opened a 60-month CD and deposited $10,000 in January 2022 that paid a 0.28% APY. After five years, you’d earn just a little more than $140 in interest.
That same $10,000 would net nearly $700 now.
- USA TODAY/Blueprint
Some of the top high-yield savings accounts currently feature rates of 4% or higher.
A high-yield account works much like a regular savings account. You open the account and then deposit and withdraw funds when you want to, within what the rules allow. The biggest difference you may see between a traditional and a high-yield account is that a larger amount of interest is earned and deposited into your account at the end of each month.
The rate is subject to change depending on the overall financial market and the business needs of the bank or credit union.
- USA TODAY/Blueprint
The Fed's rate moves also influence what borrowers pay on variable-rate home equity lines of credit (HELOCs), which are revolving lines of credit that give homeowners a flexible way to borrow against the equity they’ve built up in their homes. Similar to a credit card, you can repeatedly borrow from your credit line and will only pay back the amount you’ve drawn. You’ll also only pay interest on what you’ve actually borrowed.
HELOCs can be used for almost any purpose, from home improvement projects or debt consolidation to college tuition or emergency expenses.
The average rate on a $100,000 HELOC is 9.14% if you have a loan-to-value (LTV) ratio of 60%, 9.29% if your LTV ratio is 80% and 10.02% with a 90% LTV ratio.
- USA TODAY/Blueprint
Here are the upcoming Fed meetings planned for this year:
- USA TODAY Staff
The prime rate tends to be three percentage points above the federal funds rate, which is the interest tacked on to overnight loans between banks. Based on the current federal funds rate of 5.25% to 5.5%, the prime rate today is 8.5%.
- USA TODAY/Blueprint
The Fed’s dot plot can be found in the Fed's Summary of Economic Projections report. It’s an illustration of where individual Fed officials forecast interest rates will be years down the line. The dot plot was first created in late 2011 and was meant to give more transparency to the Fed's decisions when it came to monetary policy.
The Fed's latest dot plot indicated three cuts for 2024.
- USA TODAY Staff
Core PCE prices, which exclude volatile food and energy items and are watched more closely by the Federal Reserve, increased 0.4% in January. That still lowered the annual increase from 2.9% the previous month to 2.8%. Overall prices rose 2.4% from a year earlier, down from 2.6% and the smallest increase in nearly three years.
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The seven-member Board of Governors is the governing body of the Federal Reserve System. Each member is nominated by the President of the United States and confirmed by the Senate. Their terms are staggered and last 14 years.
- USA TODAY staff
Rate cuts are unlikely to give Americans significant relief on mortgages, auto loans, credit cards, and other types of debt anytime soon, financial experts say. Over time, the cumulative impact of lower rates could be more substantial.
The Fed influences, but does not control, mortgage rates. If you’ve found a nice, affordable home, that shouldn’t stop you from buying it, some experts say.
“You can always buy a house and refinance later if rates fall,” said Sameer Samana, senior global market strategist and investment adviser at Wells Fargo Investment Institute.
- Medora Lee
With the Fed now expected to delay rate cuts, some prospective home buyers may follow suit, some experts say.
“Unfortunately for the housing market, a decision to stay the course will likely result in a softer spring selling season,” said Dan Burnett, head of investor product at fintech Hometap, which offers home equity investment products.
The 30-year fixed rate mortgage rate has recently risen above 7% again, reversing its steady decline since October.
“Homeowners sitting on mortgage rates well below market are unlikely to sell, and prospective homebuyers staring down exorbitant monthly payments seem willing to wait,” Burnett said.
- Medora Lee
As of March 19, the average annual percentage rate (APR) for a 30-year fixed mortgage was 7.40%. That was a slight dip from the 7.49% one month ago. But it was far above the 5.8% some home buyers were able to get in late 2022.
The average APR for a 15-year, fixed-rate mortgage was 6.64% — a tick down from 6.71% in February.
- USA TODAY Staff
Since March 2022, the Fed has hiked its benchmark short-term interest rate from near zero to a 23-year high of 5.25% to 5.5% to tame inflation. With its preferred yearly inflation measure – the personal consumption expenditures (PCE) index – falling swiftly from a 40-year high of 7%, the Fed has paused since July.
- Paul Davidson
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U.S. stocks are edging higher Wednesday after the Federal Reserve indicated it’s still likely to deliver the cuts to interest rates this year that Wall Street craves, even though concerns are growing about stubbornly high inflation.
The S&P 500 was 0.6% higher at 2:47 p.m. ET after flipping between tiny gains and losses before the Fed’s announcement. The Dow Jones Industrial Average was up 0.7% and the Nasdaq composite was 0.9% higher.
In the bond market, Treasury yields had a mixed reaction.
The two-year Treasury yield, which closely tracks expectations for Fed action, initially jumped before quickly giving up the gain. It was recently at 4.64%, down from 4.69% late Tuesday.
The yield on the 10-year Treasury, which also takes into account longer-term economic growth and inflation, initially tumbled after the Fed’s announcement but then rose. It was recently at 4.29%, compared with 4.30% late Tuesday.
- Associated Press and USA TODAY Staff
The stock market response to the Fed's announcement will depend on details of the message, not the expected hold on rates.
“Investors are going to look at the FOMC statement, Chair Powell’s press conference, and the FOMC dot plots for clues as to what the future path of monetary policy might look like,” said BeiChen Lin, strategist at Russell Investments.
But with so much optimism for avoiding recession, slower inflation and lower interest rates already priced into stocks with their recent record highs, “it’s hard to come up with another catalyst for a sharp upward move higher from here,” Lin said. “Even a minor unpleasant surprise in the economic data could cause a pullback. We think investors should avoid playing the momentum game, and instead stay close to their strategic allocation to equities.”
- Medora Lee
Federal Reserve Chair Jerome Powell said earlier this month the central bank won’t begin cutting its key interest rate “until it has gained greater confidence that inflation is moving sustainably toward” its 2% goal, noting the move will likely occur “at some point this year.”Responding to questions from members of the House Financial Services Committee, Powell added, "because the economy has been so strong we think we can and should be careful" about slicing rates. He added the Fed wants "to see more good inflation readings" to feel confident that the recent pullback in price gains won't stall or reverse.
- Paul Davidson
The latest jobs report showed the country adding a robust 275,000 jobs in February.
Economists said this doesn’t change expectations that the Fed will probably start cutting interest rates in June, with the booming February job gains offset by the downgrades for previous months and a rising unemployment rate.More significantly, yearly pay increases, which feed into inflation, dipped, giving the Fed some assurance that price increases should continue to slow.
- Paul Davidson
Traditionally, the Fed reduces interest rates to jolt an economy that’s slowing significantly or already in recession. Right now, however, neither of those things is happening. The economy grew a sturdy 3.3% in the fourth quarter and a solid 2.5% for all of 2023, as consumer spending stayed strong.
Instead, the Fed tentatively plans to lower rates because inflation has eased. Otherwise, over time, inflation-adjusted rates would be too high and excessively restrain consumer and business spending.
- Paul Davidson
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