January Fed meeting preview: 3 key questions as the FOMC looks likely to push back on rate cut bets The Bankrate promise At Bankrate we strive to help you make smarter financial decisions.While we adhere to strict , this post may contain references to products from our partners.Here’s an explanation for .Slowing inflation and a strong U.S.economy had Federal Reserve watchers thinking they might get the best of both worlds in 2024: aggressive rate cuts with no recession in sight.But officials on the Federal Open Market Committee (FOMC) are bound to spend their first rate-setting meeting of the year emphasizing that, when it comes to [slashing borrowing costs](https://www.bankrate.com/banking/federal-reserve/when-will-fed-cut-rates/), they have no reason to rush.The news that officials were penciling in three cuts for 2024 — perhaps the biggest shocker from the [Fed’s final gathering of 2023](https://www.bankrate.com/banking/federal-reserve/fomc-meeting-recap-december-2023/) — stoked a major market rally.
The S&P 500 finished the year up 24 percent and has closed at a record high five times so far this year, while bond yields have tumbled from their decade-plus highs.That loosening in financial conditions is a win for consumers in the market for a loan.The [30-year fixed-rate mortgage](https://www.bankrate.com/mortgages/analysis/) has fallen more than a quarter of a percentage point since the Fed’s December meeting, a dip that could shave more than $1,000 a year off a household’s mortgage payment, Bankrate’s [mortgage calculator](https://www.bankrate.com/mortgages/mortgage-calculator/) shows.The average rate on a home equity line of credit (HELOC) has also dropped almost a full percentage point from its record-high level of 10.12 percent from November, as a wave of new introductory offers hit the market.Policymakers, however, have spent the weeks since their previous meeting trying to steer markets in the other direction.The communication has worked: Investors now see the Fed first cutting rates in May instead of March, according to [CME Group’s FedWatch tool](https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=%2Ftrading%2Finterest-rates%2Fcountdown-to-fomc.html).Yet, they’re still expecting the Fed to massively unwind its benchmark interest rate this year, pricing in 1.5 percentage points of cuts by December 2024.
That’s the equivalent of six quarter-point reductions.Absent a major economic slowdown, it’s unlikely to come to fruition, experts say.
Inflation is moving in the right direction but still above the Fed’s 2 percent goalpost.Meanwhile, consumer spending and growth in the final months of 2023 rose more than expected.Keep your expectations in check because we are not on the cusp of the Fed cutting rates.Even when they do, those cuts will likely be modest compared to the increases seen over the past couple of years.— Greg McBride, CFA | Bankrate chief financial analyst Here are the three biggest questions facing officials on the FOMC as they kick off their Jan.
30-31 rate-setting meeting.1.What will Fed Chair Jerome Powell say about rate cuts in 2024? Policymakers are expected to leave interest rates alone at their January meeting.They also aren’t planning to touch their [economic projections](https://www.bankrate.com/banking/federal-reserve/federal-reserve-dot-plot-explained-how-to-read-interest-rates/) for interest rates, growth, employment and inflation in the years ahead.
Most of the focus will be on the color that Fed Chair Jerome Powell paints about the future at the Fed’s post-meeting press conference.Powell will only be speaking as a liaison between other voting members of the FOMC.The first meeting of the new year also marks the moment when a [new crop of rotating regional Fed bank presidents](https://www.bankrate.com/banking/federal-reserve/what-is-the-federal-open-market-committee-fomc/) get a vote: Cleveland Fed’s Loretta Mester, Richmond Fed’s Thomas Barkin, Atlanta Fed’s Raphael Bostic and San Francisco’s Mary Daly.Those are the same officials who’ve been most vocal with their rate-cut pushbacks.
Daly said it’s “premature” to think that rate cuts are around the corner in a Jan.19 interview on Fox Business.Bostic told business leaders in Atlanta a day earlier that he’s expecting policymakers to start cutting interest rates in the third quarter.And hours after a Bureau of Labor Statistic report showed faster-than-expected consumer inflation for December, Mester said she views March as too early for a rate cut.
“There’s more work to do, and that work is going to take restrictive policy,” she added.Inflation rose 3.4 percent from a year ago in December, down from a staggering 9.1 percent peak in June 2022 but picking up the most speed in three months, according to the Bureau’s consumer price index (CPI).Excluding the more volatile food and energy components, core prices rose 3.9 percent from a year ago, faster than the 3.8 percent rate most economists projected.
The Fed’s preferred gauge — the Department of Commerce’s personal consumption expenditures (PCE) index — has indicated faster improvement.
Prices rose 2.6 percent from a year ago in December, while core prices climbed 2.9 percent, the smallest since March 2021.But a first look at growth in the fourth quarter of 2023 fueled more soft landing hopes.Consumer spending — the engine of economic growth — rose 2.8 percent as core inflation matched the Fed’s 2 percent target for the second straight quarter.“Despite strong economic growth, the goal of combatting runaway inflation is on its way to being accomplished from the Fed’s perspective,” says Steve Rick, chief economist at TruStage.
“I am cautiously optimistic that this year both economic growth will remain positive and inflation will ease.” 2.Inflation is falling — but will it last as the economy stays resilient? Fed officials will likely cut long before inflation has officially reached 2 percent.
Part of that is because interest rates exert more force on the economy the more inflation falls, reflecting the “real” cost of money.“The Fed, by doing nothing, is effectively tightening policy,” says Sal Guatieri, senior economist and director at BMO Capital Markets.“At some point, they have to cut policy rates to prevent real interest rates from increasing and the economy from possibly slipping into a recession.” Officials haven’t yet indicated how low they believe inflation will have to fall before they feel comfortable cutting interest rates — a question Powell will undoubtedly be pressed to answer.The Fed might feel safe following inflation down by the time core prices hit 3 percent, economists told Bankrate in its [latest Economic Indicator poll](https://www.bankrate.com/banking/federal-reserve/economic-indicator-survey-interest-rates-january-2024/).Big four accounting firm KPMG’s Yelena Maleyev projected inflation would breach that point by May 2024 — but core prices hit that level last month.Officials may also want the slowdown in inflation to look more convincing first.
“Several” Fed officials believe improving supply chains and a growing labor force might not take much more of the edge off of inflation moving forward, according to [minutes from the Fed’s December gathering](https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20231213.pdf).Restrictive interest rates will now have to play a “central” role in getting the job done, they also said.Disinflation is also expected to lose some momentum.Services, for example, are up a faster 5.3 percent when excluding energy, the Bureau of Labor Statistics shows.Gasoline prices, meanwhile, have fallen almost 35 percent since peaking in June 2022, momentum that’s unlikely to continue.“They don’t keep dropping by the magnitude they’ve been dropping if the economy is heading for a soft landing,” McBride says.“You enjoy the tailwind while it lasts, but it’s not going to last indefinitely.” 3.How quickly will the Fed cut rates in a possible soft landing? The idea of the Fed following inflation down and slowly cutting rates differs from the [past two rate-cutting cycles](https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/).
In the aftermath of the 2008 financial crisis and then 2020 coronavirus pandemic, officials dramatically and aggressively slashed borrowing costs.This time, unemployment has held at historically low levels, growth is robust and consumers are looking past higher interest rates, inflation and the return of student loan payments.“With economic activity and labor markets in good shape and inflation coming down gradually to 2 percent, I see no reason to move as quickly or cut as rapidly as in the past,” Fed Governor Christopher Waller said in a Jan.16 address at the Brookings Institution in Washington, D.C.
“My hope is that the revisions confirm the progress we have seen, but good policy is based on data and not hope.” History tells officials that they have reasons to be cautious.The Fed doesn’t want a replay of the 1970s-era stop-and-go policies that later exacerbated inflation enough for Chair Paul Volcker to self-inflict a recession.Officials have said they’d be inclined to move faster than they currently expect if inflation decelerates more quickly.Yet, Atlanta’s Bostic said the “worst outcome” for the Fed would be if it had to raise interest rates again after cutting them because inflation picked back up.“The Fed doesn’t want to run the risk of easing policy too prematurely,” Guatieri says.“It could lose a lot of credibility as an inflation fighter.
The Fed will play it a bit safe.” Another key difference about these potential rate cuts: They wouldn’t be stimulating economic growth.Even if the Fed cuts interest rates, its key benchmark will remain just as restrictive as it was before — continuing to slow demand.Bankrate’s own [2024 interest rate forecast](https://www.bankrate.com/finance/interest-rates-forecast/) shows only modest reductions in the price of borrowing money, with financing rates likely to remain the highest in over a decade.Officials are also bound to keep their options open.Before their March gathering, officials will get another look at their preferred measure of inflation, along with two jobs and CPI reports.“The Fed needs to see evidence that, once inflation is trending toward target, it will stay at target,” Guatieri says.
“Will the economy ramp back up early this year? If it does, the Fed becomes a little uncomfortable about the sustainability of lower inflation.” Bottom line With higher rates here to stay, consumers should prioritize [eliminating any high-cost debt](https://www.bankrate.com/personal-finance/debt/how-to-pay-off-debt/).Look for 0 percent interest [balance transfer offers](https://www.bankrate.com/finance/credit-cards/balance-transfer/) and form a debt payoff plan to accelerate your credit card debt repayment, McBride says.Meanwhile, consider refinancing into fixed-rate debts — or a new, lower fixed-rate loan in general if your credit has improved.Meanwhile, if you’ve been eyeing a certificate of deposit (CD), there’s no benefit in waiting to lock one in, especially when it comes to longer-term CDs with maturities of two to five years.The [top-yielding 5-year CD](https://www.bankrate.com/banking/cds/best-5-year-cd-rates/) has already edged lower in recent weeks, falling to 4.6 percent in the most recent Bankrate data available from 4.75 percent in December.
“There’s nothing in the economy that indicates any type of urgency to cut rates,” McBride says.“The stock market is at a record high, bond spreads are still at very low levels — that argues for ‘higher for longer,’ not an accelerated time table toward rate cuts.” Related Articles [ When will the Fed cut rates? Some economists say the timing might not be as far off as officials think](https://www.bankrate.com/banking/federal-reserve/when-will-fed-cut-rates/) [ Is the Fed finally done raising interest rates? As inflation slows, policymakers are giving their clearest clues about it yet](https://www.bankrate.com/banking/federal-reserve/will-the-fed-raise-rates-in-2024/) [ Fed keeps interest rates at 22-year high as economy stays surprisingly strong](https://www.bankrate.com/banking/federal-reserve/fomc-meeting-recap-november-2023/) [ Fed holds rates near zero as presidential election results remain uncertain](https://www.bankrate.com/banking/federal-reserve/fomc-meeting-recap-november-2020/).
