By Christopher Lugerber, Economics writer for the Associated Press
WASHINGTON (AP) — The Federal Reserve on Wednesday is expected to show it could cut its key interest rates twice this year, despite the economy receiving what could be at risk.
However, the reasons for these cuts can change dramatically depending on the economic fares.
What was once considered a decline in the “good news” rate could be “bad news” reductions that are now being implemented to offset the economy, following widespread tariffs, rapid reductions in government spending and a surge in economic uncertainty, in response to a steady decline in inflation that has returned to the Fed’s target of 2%.
At the end of last year, the Fed tripled its main interest rates from 5.3% to about 4.3%. The Fed has rapidly raised its rates to combat inflation, and as price growth drops, central banks have been able to reverse some of those rate hikes. In September, inflation fell to a 2.4% low of 31/2.
However, inflation rose for the fourth consecutive month, eventually returning in February, reaching 2.8% per year. To reversal, Chairman Jerome Powell emphasizes that the Fed is in standby mode to assess the impact of President Donald Trump’s policy on the economy.
So far, consumer sentiment has dropped sharply as Americans worry about an increase in inflation in the coming months. Small business owners report far more uncertain economic outlooks, which could cut jobs and investments.
Retailers of both high-end and low-cost goods are warning that consumers are becoming more cautious as they expect prices to rise due to tariffs. After a sharp decline in January, retail sales rose modestly last month. Home builders and contractors expect home construction and renovations to be more expensive.
On Tuesday, the Fed reported that production had jumped over and over last month, rising due to a surge in car production. Some of this may reflect car purchases by consumers seeking to preempt customs duties. Construction of new homes has also grown faster than expected.
Many economists have significantly reduced forecasts for growth this year, with Barclays projecting growth of just 0.7% to just 0.7% in 2024. Goldman Sachs economists expect inflation, excluding the volatile food and energy categories.
Higher unemployment and high inflation will slow growth if the Fed is in a very difficult place. Typically, when businesses begin to cut workers, the Fed will lower interest rates, boosting more borrowing and spending, and boosting the economy.
However, if inflation creeps up higher, you will want to continue raising the rate to slow growth and curb inflation. When the Fed raises key interest rates, it tends to push other borrowing costs higher, such as mortgages, car loans, business loans, and credit cards.
The economist will take a close look at Powell’s press conference on Wednesday to see if it shows how the Fed will handle such a situation.
But Powell will likely double down on recent efforts to highlight that the Fed can see from the sidelines for now.
“The cost of being cautious is very low,” Powell said earlier this month. “The economy is fine. There’s really no need to do anything.”
Separately, Fed Trustees’ trustees member Christopher Waller said that as long as inflation still declines after the tariffs are excluded, even if tariffs are imposed, the Fed can cut again this year.
But in an interview with the Wall Street Journal earlier this month, he admitted that it’s difficult to tease the impact of fees on prices.
“You’re trying to find a signal for the basics. “And that’s difficult.”
Original issue: March 19, 2025, 7:48am EDT
