The result: The Federal Reserve is very unlikely to cut interest rates in the next few months. Officials have been looking for a bit more assurance that inflation is steadily falling before deciding it’s time to trim borrowing costs. But since the start of the year, the data has brought unwanted surprises, with economists and the markets now expecting no cuts until later in 2024.
The Fed “is nowhere near where they’re going to need to be,” said Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office. “March would not give anyone any confidence.”
Major stock indexes flashed red, with the Dow Jones Industrial Average, the S&P 500 and the Nasdaq each falling by more than 1 percent.
A delayed timeline for rate cuts could also collide with November’s presidential election. The Fed works hard to distance itself from politics, but central bankers are bound by their calendar. Wednesday’s report dashed expectations for an initial cut in June. And that leaves future moves to the Fed’s meetings in July, September and the first week of November — the height of election season, when Republicans and Democrats are racing to leverage the economy in their appeals to voters.
In a statement, President Biden said “fighting inflation remains my top economic priority” and touted moves to lower prescription drug costs and tackle hidden junk fees.
“We’re making progress: wages are rising faster than prices, incomes are higher than before the pandemic, and unemployment has remained below 4 percent for the longest stretch in 50 years,” Biden said. “But we have more to do.”
The main drivers of inflation — housing and energy costs — told a familiar story in March, and together made up more than half of the month-to-month increase for all of the items that go into the consumer price index. Rent costs rose 0.4 percent in March, a slight improvement over February. But they are still up 5.7 percent compared with a year ago. The energy index rose 1.1 percent in March, down from the 2.3 percent notched in February, but still up 2.1 percent over last year. Costs for car insurance also contributed to the hot report.
The Fed entered the year bolstered by six months of encouraging data — and notable progress since inflation soared to 40-year highs in the middle of 2022. For much of last year, healing supply chains helped ease prices for all kinds of goods, from couches to electronics and more. Gas prices also cooled off dramatically, after Russia’s 2022 invasion of Ukraine roiled global energy markets. Put together, the progress on goods and energy costs helped bring inflation way down from a peak of 9.1 percent. And going into this year, the hope was the trend would continue.
But prices went in the other direction in January, February and now March, coming in hotter than expected and disrupting the Fed’s remarkable streak of welcome news. Economists say that’s partly because there isn’t much relief coming from goods or energy prices anymore. And in the meantime, a thornier inflation category — stemming from services like hospitality, leisure and health care — hasn’t had a major breakthrough.
Policymakers will splice the report for narrower readings that help them gain a sharper sense of how inflation is pulsing through the economy. For example, a key measure that strips out more volatile categories like food and energy rose 0.4 percent in March, as it did for the two previous months. That won’t offer much comfort to officials in light of the services trend.
Similarly, officials like to compare data month to month — instead of year to year — since the economy can change so quickly. There, too, the Fed saw muted progress, with prices rising at the same rate in March as they did in February.
The central bank has pushed interest rates to their highest level in 23 years to combat inflation, and officials said before this latest report that they expect to cut rates three times this year.
So far, the inflation numbers haven’t signaled any urgency to bring rates back down, though.
Still, Lindsay Owens, executive director of the Groundwork Collaborative, a left-leaning think tank, said there’s a disconnect between the parts of the economy that are driving inflation and the parts the Fed is trying to tame through high rates. For example, car insurance claims don’t go down if the Fed keeps rates high, Owens said. Energy costs are often tied to events around the world.
“None of these things are remotely in the realm of things that are impacted through demand destruction,” Owens said. “I think if anything, this was not good news for those of us who want to see rate cuts sooner, but I think that’s unfortunate and misguided.”
At a news conference last month, Fed Chair Jerome H. Powell said the task of getting inflation down to normal levels was always going to be bumpy.
“Now here are some bumps, and the question is, are they more than bumps?” Powell said March 20. “And we just don’t — we can’t know that. That’s why we are approaching this question carefully.”
But financial markets are also wary that the uncertainty could interfere with cuts this year. Stocks dropped last week after Minneapolis Fed President Neel Kashkari said that while he has cuts in his forecast, that could change if progress stalls.
“That would make me question whether we needed to do those rate cuts at all,” he said.
Over the past few years, inflation has been driven by different factors. More recently, housing costs have kept the rate high. Plenty of economists argue the official statistics in the consumer price index are delayed and aren’t accounting for real-time measures that show rents falling in many places. But policymakers are still unsure why the shift hasn’t shown up yet. And the longer the shift takes, the harder it will be to wrestle overall inflation down.
“I bought that argument for the first year,” Holtz-Eakin said. “But at some point, it actually has to change.”
All of these factors pushed the Fed to raise borrowing costs after inflation spiked. That’s meant to slow the economy by making it more expensive to get a mortgage, take out a car loan or grow a business. And while practically every economist expected that all-out effort to tip the economy into a recession, the opposite has happened, with job growth and consumer spending holding strong.
But it hasn’t returned all the way to normal, and Fed officials are quick to caution that victory isn’t guaranteed. The Fed’s target is to get inflation to 2 percent, using its preferred inflation measure. That metric is different from the one released by the Bureau of Labor Statistics on Wednesday, and it clocked in at 2.5 percent in February compared with the year before.
