WASHINGTON - The US Federal Reserve is widely expected to start cutting interest rates in the coming months, as inflation edges closer to its long-run target of 2%. What is less clear, however, is when the first of those cuts will come.

While the US central bank is almost certain to announce it is holding its key lending rate steady at its next rate
decision on Wednesday, analysts think it could also drop some more hints that cuts are coming. 

In economic forecasts published
alongside the last Fed decision,
policymakers indicated that they expect as many as three quarter percentage-point rate cuts this year – although they did not indicate when they might begin.

During a press conference after the rate decision was announced, Fed Chair Jerome Powell said policymakers had even
discussed when it would be “appropriate” for the Fed to begin cutting interest rates, without providing any additional
details. 

Divisions have opened up between analysts and traders who believe the Fed’s rate-setting committee will start cutting
rates in March, and those who think a move later in the year would make more sense.

“If we are right on our outlook for a rate cut in March, it is likely because a majority of participants focus on more aggregated measures of inflation than specific components,” Bank of America economists wrote in a recent investor
note.

Meanwhile, Wells Fargo chief economist Jay Bryson told AFP on Friday that
recent inflation data is keeping hopes of a March cut “live,” but added: “I still think
that’s a little bit premature. There may be
some members who are willing to
contemplate rate cuts as soon as March; I
 just don’t think you can get a supermajority to agree to that,” he said in an
interview.

Recent economic data showed that growth in the United States reached 2.5% in the year to December, underscoring the enduring, unexpected strength of the world’s biggest economy. In more good news, the Fed’s favoured measure of inflation has dipped below 3%, and the unemployment rate has hugged close to record lows – raising expectations the United States can
bring down inflation without causing a recession.

The Fed has a mandate to act independently of the US Congress, but its upcoming decisions will nevertheless be closely parsed by politicians on both sides of the aisle. That’s because 2024 is a presidential election year, with a likely rematch on the cards between president Joe Biden and his predecessor Donald Trump.

Fed interest rate cuts can help reduce the cost of consumer
loans, making everything from cars to mortgages more affordable for millions of households.

The Biden administration is hoping that growing consumer confidence in the economy will translate into more
votes for Democrats, while Republicans are betting that unhappiness over historical inflation could cause voters to turn to them instead. Fed officials have used recent public remarks to indicate support for a more cautious approach to cutting interest rates than the financial markets were predicting immediately after December’s rate decision.

At the time, traders were pricing in six 25 basis point interest rate cuts for 2024, with the first of them arriving in March. 

- Nampa/AFP