With inflation edging closer to the Federal Reserve’s 2% target, its policymakers are facing – and in some cases fueling – hopes that they will make a decisive shift in policy and cut interest rates next year, possibly as soon as spring.
Such a move would reduce borrowing costs across the economy, making mortgages, auto loans and business borrowing less expensive. Stock prices could rise, too, though share prices have already risen in expectation of cuts, potentially limiting any further rise.
Fed Chair Jerome Powell, though, has recently downplayed the idea that rate reductions are nearing. With the central bank poised to keep its key short-term rate unchanged when it meets this week, Powell hasn’t yet signaled that the Fed is conclusively done with its hikes. Speaking recently at Spelman College in Atlanta, the Fed chair cautioned that “it would be premature to conclude with confidence” that the Fed has raised its benchmark rate high enough to fully defeat inflation.
But the Fed’s two-day meeting that ends Wednesday, Dec. 13, will mark the third straight time that its officials have kept their key rate unchanged, lending weight to the widespread assumption that rate hikes are over.
The economy, after all, is headed in the direction the Fed wants: On Tuesday, Dec. 12, when the government releases the November inflation report, it’s expected to show that annual consumer price increases slowed to 3.1%, according to a survey of economists by FactSet, down sharply from a peak of 9.1% in June 2022.
And job openings have declined, which means companies are less desperate to hire and feel less pressure to sharply raise wages, which can accelerate inflation. Consumers are still spending, though more modestly, and the economy is still expanding.
Such trends suggest progress toward what economists call a “soft landing,” in which inflation reaches the Fed’s 2% target without causing a recession. Analysts are increasingly encouraged by what they say is an unusually smooth adjustment to lower inflation.
That sunnier outlook represents a shift in thinking. Last year, many economists had insisted that defeating inflation would require a sharp recession and high unemployment. In fact, falling inflation, without an accompanying recession or job losses, is “historically unprecedented,” economists at Goldman Sachs wrote in a recent note.
Read the full report from the Associated Press here.