Fed likely to hint interest rates will remain high

Federal Reserve Chair Jerome Powell is scheduled to speak Wednesday at the end of the Fed's first meeting since recent inflation readings dampened hopes that the central bank will lower interest rates three times this year.

Though officials aren't slated to update their March forecasts on the economy, inflation and rates, Powell could provide clues on where he thinks interest rates are headed. For now, the Fed is expected to keep its key short-term interest rate unchanged at a 23-year high of 5.25% to 5.5%.

After hitting a 40-year high of 9.1% in mid-2022, annual inflation eased substantially last fall, falling from 3.7% to 3.1%. A core measure that strips out volatile food and energy items dipped below 4%, according to the consumer price index, or CPI.

But prices jumped each month in the first quarter of 2024, leaving yearly inflation at 3.5% in March and the core measure at 3.8%.

Another inflation gauge called the personal consumption expenditures index – which the Fed watches more closely – followed a similar pattern, though it's running about a percentage point lower. Overall inflation is at 2.7% and the core measure is at 2.8%, well above the Fed's 2% goal, according to the PCE.

Initially, Powell said price increases in January and February simply could have been blips on a steady path to 2% inflation, and Fed officials' forecast for three rate cuts this year remained intact. But after the reports for March, Powell changed his tone.

"The recent data have clearly not given us greater confidence (that inflation is heading sustainably to 2%) and instead indicate that it's likely to take longer than expected to achieve that confidence," he said at a recent forum.

Futures markets now predict just one cut, in September.

Most economists believe that inflation is easing. Goldman Sachs says the recent flare-up can be traced to temporary factors.

Rent, which made up 36% of March's price surge, actually has fallen based on new tenant leases but that hasn't yet rippled to existing lease renewals.

Car insurance, which has soared 22% in the past year, is still catching up to a pandemic-related leap in new vehicle prices as state regulators approve rate hikes. With vehicle prices flat or falling, insurance premium increases should soon moderate, Goldman says.

And financial service costs vaulted because portfolios increased in value during a market rally and investment company fees are typically based on a percentage of assets. But the rally recently has sputtered.

Meanwhile, wage growth is slowing as the labor market cools and immigration expands the supply of workers, a development that should curtail price increases, Goldman says. It expects core PCE inflation to slip to 2.6% by July and predicts two rate cuts.

Barclays broadly agrees and expects inflation to slow notably starting in June, with a possible uptick later in the year as pay increases stay elevated in some industries.

As for the oracle's remarks, both Goldman and Barclays expect Powell to reiterate his comment that it will "likely take longer than expected to achieve that greater confidence" needed to cut rates.

Barclays economist Marc Giannoni doesn't expect Powell to "be very specific about the number of cuts" since Fed officials aren't updating their forecasts and Powell has said Fed decisions will hinge on the course inflation takes in coming months.

But Powell could downplay the relevance of the Fed's March forecasts, signaling that three rate cuts aren't likely, Giannoni says.