The Fed Stays the Course on Rates

Jay Powell, the Fed chair, hasn’t said when the central bank will start cutting interest rates, but markets are betting on June.Credit…Pete Marovich for The New York Times

Three cuts are still in the cards

Stocks are again in record territory on Thursday after the Fed reiterated that it expected to cut interest rates three times this year despite facing a “sometimes bumpy road” to bring inflation down to its 2 percent target.

In a dose of good news for Wall Street and Washington, the central bank sees solid economic growth this year, and only a slight cool-down in the labor market. However, the Fed also said that inflation would stay hotter for longer.

The upbeat outlook is dividing Wall Street. Mohamed El-Erian, the economist who’s been critical of the Fed’s messaging, said the dovish pronouncement was evidence that the Fed was willing “to tolerate higher inflation for longer” as it mulled reducing a prime lending rate that’s at a 22-year high.

Others warn that resurgent inflation could dash the Fed’s timeline. “Upcoming inflation reports will take on increased importance in determining whether the first cut can come in June,” Michael Gapen, Bank of America’s chief U.S. economist, wrote in a research note on Wednesday after the Fed released its policy statement.

The futures market Thursday morning gave an 84 percent chance of a June cut, up from 60 percent on Wednesday. (Jay Powell, the Fed’s chair, did not say when the bank might cut rates.)

The Fed is at an inflection point, warn analysts at Liberum, the investment bank. Keeping rates unchanged could push the economy into recession. Moving too fast, or cutting more than three times, would push inflation toward 3.7 percent by early 2025, theywrote in a report this morning.