WASHINGTON (AP) — Ever since the Federal Reserve signaled last fall that it was nearly done raising interest rates, Wall Street traders, economists, car buyers and potential home buyers have been obsessed with one question: When will the Fed start cutting rates?
But now, with the U.S. economy showing surprising strength, another question is emerging: Will the central bank really cut rates three times this year, as the Fed itself has predicted, or will it cut at all? The Fed typically cuts rates only when the economy is weakening and in need of support.
Lower interest rates could make borrowing cheaper for homes, cars and other big purchases and boost stock prices, all of which could lead to faster growth. A stronger economy could also help President Joe Biden's reelection campaign.
The March jobs report released on Friday cemented the view that the economy is running on its own: The government said employers added a surge of more than 300,000 jobs last month, and the unemployment rate fell to 3.8% from 3.9%.
Some analysts countered, arguing that it's clear that the last thing the economy needs right now is further stimulus from low interest rates.
“If the data is so strong, why cut rates,” asked Torsten Slok, chief economist at asset manager Apollo Global Management. “I don't think the Fed will cut rates this year. Higher rates for longer is the answer.”
In March, central bank policymakers as a group planned to cut interest rates three times in 2024, as they did in December. Some economists still expect the Fed to cut rates for the first time in June or July. But even at last month's Fed meeting, some cracks were emerging: Nine of the 19 policymakers expected no more than two rate cuts in 2024.
Since then, Friday's jobs report, coupled with an unexpectedly upbeat report showing factory production expanding again after months of contraction, have suggested the economy is continuing to grow at an unexpectedly healthy clip, defying long-held expectations that it would weaken even as the Fed continues to raise interest rates aggressively in 2022 and 2023, sending mortgage rates and other borrowing costs soaring.
The trend has some Fed officials worried: Inflation has fallen significantly from its peak but remains above the central bank's 2% target, and faster economic growth could reignite inflationary pressures, undoing the progress made so far.
In a series of speeches last week, several Fed officials stressed that there was little need to cut interest rates anytime soon, saying instead they needed more information about where the economy was headed.
“It's premature to think about lowering interest rates,” Dallas Federal Reserve Bank President Lori Logan said in a speech. “We need to see more resolution of the uncertainty about what economic trajectory we're on.”
Atlanta Fed President Raphael Bostic said he would prefer just one rate cut this year and not in the final three months, while Minneapolis Fed President Neel Kashkari suggested the Fed may not cut rates this year, sending stocks lower Thursday afternoon.
“The question that comes to mind is, if job growth continues to be strong, if consumer spending and GDP growth continues to be strong, why cut rates?” Kashkari said.
Still, strong economic growth and employment alone don't necessarily preclude a rate cut. Officials such as Chairman Jerome Powell and Cleveland Fed President Loretta Mester have stressed that a key driver of the Fed's rate cut decision will be when or if inflation falls again to the central bank's 2% target. They point out that the economy grew at a rapid clip in the second half of 2023, even as inflation steadily declined. Inflation, according to the Fed's preferred measure, is now at 2.5%, down from a peak of 7.1%.
Still, “core” prices, which exclude volatile food and energy prices, rose faster than the Fed's target in January and February, raising concerns that inflation is not fully contained.
As a result, upcoming government inflation reports will be scrutinized for signs that inflation is easing further. The Consumer Price Index report due on Wednesday is expected to show that core prices rose 0.3% from February to March, a rate of increase that is generally not favored by the Fed.
One reason Powell believes the economy can keep growing even if inflation subsides is that the supply of workers has grown rapidly over the past two years, a trend that makes it easier for the economy to ramp up production and avoid shortages when demand is strong. It also helps keep wage and price growth in check.
A surge in immigration over the past two years, most of it illegal, has dramatically increased the number of workers willing to work, helping to alleviate a labor shortage that has plagued the economy in the wake of the pandemic and caused wages to soar for retail, restaurant and hotel workers.
“We have a lot more people working,” Mr. Powell said at a Stanford University panel this week. “The economy is expanding, not contracting.”
Whether the trend of rising labor supply continues this year will help determine the Fed's next move.
Still, at a San Francisco Fed conference last month, even Powell acknowledged that a healthy economy reduces the urgency of cutting rates, saying, “I don't see this economy as suffering at the current level of interest rates.”
In fact, Slok and some Fed officials believe borrowing costs are not holding back the economy as much as they used to, because several trends in today's economy could keep growth, inflation and interest rates higher than they have been in the past 20 years. These include a more productive economy, larger government deficits and some manufacturing moving back to the U.S. from overseas, where costs are higher.
“It's extremely hard to make the case that the Fed should cut rates, and the discussion about raising rates again would probably be more robust than it is now,” said Thomas Simons, an economist at Jefferies.