Feds Eyeing Interest Rate Cuts As Inflation Slows

In an interview with 60 Minutes, Federal Reserve Chair Jerome Powell said that interest rates will likely be cut this year. He was optimistic that inflation would continue to slow in the U.S., allowing the Fed to reduce interest rates possibly as soon as May.

Historically, the Federal Reserve has used interest rates to combat inflation, where prices rise and the dollar has less purchasing power. When they raise interest rates, financial institutions have to raise their rates on loans and pass them on to customers. These loans include mortgages, auto loans, business loans, and credit cards, among other expenses.

While interest rates have risen and fallen over the last several decades, they hit a record low of 2.65% in January 2021 during the COVID-19 pandemic. The pandemic disrupted the economy, causing consumers to cut their spending drastically, which hurt countless businesses worldwide. So, the Fed lowered rates in the hopes of allowing people to borrow money and spend more on houses and businesses.

However, inflation began rising dramatically in 2021 after Biden’s election, hitting the highest it had been in decades at 9.1% in June 2023. The Fed expected the inflation to be short-lived, so it didn’t start raising rates until March 2022. Since then, the Fed has continued to slowly raise rates, trying to curb inflation by slowing people’s eagerness to borrow and spend cash.

Powell seemed optimistic that they would be able to cut rates soon but stressed that they wanted to continue seeing inflation go down. However, he was happy with the progress the economy has made so far. “We’ve got six months of good inflation data and an expectation that there’s more to come,” he said on Wednesday.

Many investors had hoped that the Fed would lower the interest rate in March, but Powell’s statement dashed those hopes. Inflation has slowed, but not enough to make the Fed comfortable with cutting interest rates yet.

The latest data shows inflation sitting at around 3.4%. Overall, the Fed typically hopes to have a target inflation rate of 2%, using tools like interest rates to try to adjust this number across the economy. While 3.4% is still higher than the target, the measures of inflation show that it’s far lower than where it was last year.

The federal interest rate currently sits at 5.25% to 5.50%, but it is unclear how much the Fed might drop this rate. Powell said he hopes to reduce the rate slowly, perhaps cutting it three times throughout the year.