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Experts urge caution when it comes to the Federal Reserve lowering interest rates


Inflation has eased, thanks in part to the Federal Reserve, which has spent two years raising interest rates. Now they face a question - how soon to start cutting them? The Fed's policymakers, the people who set interest rates, are completing a two-day meeting today, and NPR correspondents Scott Horsley and David Gura are following this. Hi, gentlemen.



INSKEEP: Scott, what are you looking for today?

HORSLEY: Well, it's all but certain the Fed is going to hold interest rates steady today. There's not much suspense about that. The question is, what kind of smoke signals are we going to get about possible rate cuts at the next few meetings? You know, and it is a balancing act. The Fed doesn't want to cut rates too quickly and run the risk of rekindling inflation, but it also doesn't want to wait too long and take a chance on slowing the economy more than it has to. The Fed is probably not going to spell out a precise timetable for rate cuts today, but Fed watchers will be reading between the lines, the policy statement, you know, parsing every word that Fed Chairman Jerome Powell says at his news conference. If Powell talks a lot about the recent drop in inflation, that might suggest the Fed is leaning towards an earlier rate cut. If, on the other hand, Powell is all about the strong job market and strong consumer spending and strong economic growth, well, that would point instead towards a more cautious, patient approach.

INSKEEP: David Gura, I've been doing some in-depth research, by which I mean I just googled the Dow Jones Industrial Average, and it's gone up the past couple of months. Is that just investors expecting buying into an interest rate cut in a growing economy?

GURA: Yeah, we saw the Dow Jones Industrial Average set a new record. The S&P 500, the kind of broader-based larger index, has set a couple of new records as well. This comes after a strong year for stocks. 2024 got off to a slow start. Investors were fairly cautious. But then things really started to rally and boom. And what's animating Wall Street lately, Steve, what's made investors more optimistic and confident, is all of the strong economic data that Scott just mentioned. Remember, when rates go down, borrowing costs go down, and that juices the economy and usually leads to higher stock prices.

These economic data have fueled Wall Street's expectations the Fed will feel, one, confident enough in the not-too-distant future to cut interest rates, and, two, that it'll feel comfortable enough to keep cutting them several times in 2024, which is something Fed Chair Jerome Powell didn't really challenge at his last news conference - I know Scott was there - back in December. John Canavan is the lead market analyst at Oxford Economics, who noticed a change in tone from the Fed chair in his comments about the Fed's path forward.

JOHN CANAVAN: Powell was really quite blase about the issue and offered very little pushback against the idea that the Fed is getting close to cutting rates.

GURA: After that news conference, stocks surged, but what we've seen in recent weeks, Steve, is Wall Street sort of recalibrating its expectations. Markets are now pricing in only a 50% chance the Fed will cut rates at the meeting after this one in March.

INSKEEP: OK, so a little bit of skepticism there. Does that mean they do not believe the battle against inflation is really won?

HORSLEY: A lot is going to depend on what the economic numbers show over the next couple of months. You know, there have certainly been encouraging numbers in recent months about what inflation is up to. Over the last six months or so, so-called core inflation has been tracking right around 2%, which is the Fed's target. If that positive trend continues for another month or two, it's conceivable the central bank will feel OK about cutting rates in March.

On the other hand, if the upcoming numbers show inflation is running a little hotter than that or if the job market and consumer spending are particularly strong in the next few months, then the Fed may decide to hold off. One of the people sitting around the table making that decision is Raphael Bostic. He's the head of the Federal Reserve Bank of Atlanta, and I'd put him in the cautious camp. He told the Atlanta Rotary Club this month he's going to be very careful not to declare victory over inflation prematurely.

RAPHAEL BOSTIC: We have history on this. So in the '70s, the Fed started removing accommodation too soon. Inflation spiked back up. Then we had to tighten, and inflation came down. Then we removed it again. It went back up. And by the time we were done with that, all Americans could think about was inflation.

HORSLEY: And the last thing the Fed wants is a rerun of that '70s show. Bostic says right now, all the signs do look pretty good for a so-called soft landing - that is, inflation's coming down, but the economy's still holding up. But he noted there have been a number of curveballs already in this cycle where things did not turn out the way the Fed thought they would. And so he and his colleagues are not taking anything for granted.

INSKEEP: Are the cautious Fed governors and the excited investors really on the same page, though?

GURA: It's been described to me as a game of tug of war, Steve. Strategists told me that adding this kind of dissonance or this kind of disconnect between markets and the Fed isn't unusual, and markets can kind of help and hinder the Fed in its fight against high inflation. Of course, a lot of key interest rates are tied to bonds, and right now the bond market is still behaving as if interest rates are going to come down soon.

HORSLEY: You can see that, for example, in the mortgage market where mortgage rates have already come down. They were up near 8% back in October. Now they're somewhere just over 6 1/2%.

GURA: It kind of illustrates that the market is doing some of the Fed's work for it. Christina Hooper is the chief global market strategist at Invesco. And I asked her how much the Fed worries about being on the same page as Wall Street. And she said the Fed's not worried the market has in some way gotten it wrong.

KRISTINA HOOPER: It's more about, hey, we're worried the market does understand where we're going, but we don't want it to get ahead of itself because that will cause financial conditions to ease, and that will make our job harder.

GURA: The Fed's fear is markets could get too bullish, and if stocks surge and yields fall too much, that could limit the effectiveness of the Fed's tools, especially if we were to see stronger and stronger growth.

HORSLEY: And as you mentioned, at various points, investors have gotten ahead of themselves, and the central bank has come out and smacked them down, warning them not to bet too heavily on a rapid cut in interest rates. But as you said, David, we didn't hear that kind of warning from Jerome Powell at the last Fed meeting in December. We'll see if he waives the caution flag today.

INSKEEP: NPR's Scott Horsley and David Gura, thanks to both of you.

HORSLEY: You're welcome.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.