The Fed hesitant to cut interest rates though inflation is nearly back to 2%

Published

2 years ago

February 12, 2024

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WASHINGTON (AP) From Wall Street traders to car dealers to home buyers, Americans are eager for the Federal Reserve to start cutting interest rates and lightening the heavy burden on borrowers.

The Fed is widely expected to do so this year probably several times. Inflation, as measured by its preferred gauge, rose in the second half of 2023 at an annual rate of about 2% the Fed’s target level. Yet this week, several central bank officials underscored that they werent ready to pull the trigger just yet.

Why, with inflation nearly conquered and the Fed’s key rate at a 22-year high, isn’t now the time to cut?

Most of the Fed’s policymakers have said they’re optimistic that even as the economy and the job market keep growing, inflation pressures will continue to cool. But they also caution that the economy appears so strong that there’s a real risk that price increases could spike again.

And some are worried that if they cut rates now and inflation re-accelerates, then the Fed could be forced into an about-face and have to raise rates again.

“History tells many stories of inflation head-fakes,” said Tom Barkin, president of the Federal Reserve Bank of Richmond, in a speech Thursday.

Inflation had seemed defeated in 1986, Barkin noted, when Paul Volcker was Fed chair.

The Fed reduced rates, but inflation then escalated again the following year, causing the Fed to reverse course,” he said.

“I would love to avoid that roller-coaster if we can, said, Barkin, who is among 12 Fed officials who vote on interest rate policy this year.

Several officials have said they want more time to see if inflation continues to subside. In the meantime, they note, the economy is solid enough that it can thrive without any rate cuts. Last month, for example, Americas employers delivered a burst of hiring, and the unemployment rate stayed at 3.7%.

Theyre going to be glacial, and take their time, said Steven Blitz, chief US economist at GlobalData TS Lombard. Theyre willing to say, We dont know, but we can afford to wait so were going to wait. “

The sturdiness of the economy has also raised questions about just how effective the Feds 11 rate hikes have been. If higher borrowing rates are only barely restraining the economy, some officials may conclude that high rates should stay in place longer or that few rate cuts will be needed.

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I dont feel theres a sense of urgency here, Loretta Mester, president of the Cleveland Federal Reserve, told reporters Tuesday. I think later this year, if things evolve as anticipated, we would be able to start moving the rate down.

Yet their caution carries risks. Right now, the economy appears on track for a soft landing,” in which inflation would be defeated without causing a recession or high unemployment. But the longer that borrowing rates stay high, the higher the risk that many companies and consumers would stop borrowing and spending, weakening the economy and potentially sending it into a recession.

High rates could also compound the struggles of banks that are saddled with bad commercial real estate loans, which would be harder to refinance at higher rates.

The high cost of borrowing has become a headache for David Kelleher’s Chrysler-Jeep dealership just outside of Philadelphia. Just 2 1/2 years ago, Kelleher recalled, his customers could get an auto loan below 3%. Now, they’re lucky to get 5.5%.

Customers who had monthly car lease payments of, say, $400 three years ago are finding that with vehicle prices much higher and interest rates up, their monthly payments would be closer to $650. The trend is pushing many of his customers toward lower-priced used cars or no purchase at all.

We need the government to address the interest rates … and understand that theyve accomplished their goal of lowering inflation,” Kelleher said. If interest rates can come down, I think were going to start selling more cars.

Kelleher is likely to get his wish by May or June, when most economists expect the Fed to start reducing its benchmark rate, which is now at about 5.4%. In December, all but two of the 19 policymakers that participate in the Fed’s policy discussions said they expect the central bank to cut rates this year. (Twelve of those 19 actually get to vote on rate policies each year.)

Yet economic growth has accelerated since then. In the final three months of last year, the economy expanded at an unexpectedly strong 3.3% annual rate. Surveys of manufacturers and service-providers, such as retailers, banks, and shippers, also reported that business perked up last month.

Collectively, the latest reports suggest that the economy may not be headed for a soft landing but rather what some economists call a no landing. By that they mean a scenario in which the economy would remain robust and inflation an ongoing threat, potentially stuck above the Fed’s target. Under this scenario, the Fed would feel compelled to keep rates at elevated levels for an extended period.

Powell said last week that while the Fed wants to see continued strong growth, a strong economy does threaten to send inflation up.

I think that is a risk … that inflation would accelerate, Powell said. I think the greater risk is that it would stabilize at a level meaningfully above 2%. … Thats why we keep our options open here and why were not rushing.”

Other officials this week drove home the point that the Fed is trying to balance the risk of cutting rates too soon which might cause inflation to surge again and keeping rates too high for too long, which could trigger a recession.

At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce rates, Andrea Kugler, a recently appointed Fed governor said Wednesday in her first public speech. On the other hand, if progress on disinflation stalls, it may be appropriate to hold the target range steady at its current level for longer.

Some analysts have pointed to signs that the economy is becoming more productive, or efficient, allowing it grow faster without necessarily increasing inflation. Yet productivity data is notoriously hard to measure, and any meaningful improvement wouldn’t necessarily become apparent for years.

Still, maybe the economy can take higher interest rates than we thought in 2019 before the pandemic, said Eric Swanson, an economist at the University of California, Irvine.

If so, that might not just delay the Fed’s rate cuts, but result in fewer of them. Fed officials are still saying they plan to cut rates perhaps three times this year, below the five or six that some market analysts foresee.

World

Russia hits Ukraine with massive missile and drone attack amid peace talks

Published

53 mins ago

December 6, 2025

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Russia hits Ukraine with massive missile and drone attack amid peace talks

Russia launched a massive missile and drone attack on Ukraine overnight, after US and Ukrainian officials said they would meet for a third day of talks aimed at bringing the war to an end.

The two sides said they had made progress on a security framework for post-war Ukraine, but that any “real progress toward any agreement” will depend “on Russia’s readiness to show serious commitment to long-term peace.”

Russia launched 653 drones and 51 missiles in its attack on Ukraine, triggering air raid alerts across the country, Ukraine’s air force said.

Ukrainian forces shot down and neutralised 585 drones and 30 missiles, the air force said, adding that 29 locations were struck.

At least eight people were wounded in the attacks, Ukraine’s minister of internal affairs Ihor Klymenko said.

Russia conducted a “massive missile-drone attack” on power stations and other energy infrastructure in several regions, Ukraine’s national energy operator Ukrenergo said on Instagram.

Ukraine’s Zaporizhzhia nuclear power plant temporarily lost all off-site power overnight, the International Atomic Energy Agency said.

The plant is in an area that has been under Russian control since early in Moscow’s invasion of Ukraine. It is not in service, but needs reliable power to cool its six shutdown reactors and spent fuel in order to avoid any catastrophic nuclear incidents.

Zelenskyy condemns ‘meaningless’ strikes

Ukrainian President Volodymyr Zelenskyy condemned the strikes as “meaningless” from a military point of view.

He said energy facilities were the main targets, but a drone strike had “burned down” a train station in the city of Fastiv, in the Kyiv region.

“The Russians’ goal is to hurt millions of Ukrainians, and they have sunk so low that they are launching missiles at peaceful cities on St. Nicholas Day,” he said.

“That is why additional pressure is needed. Sanctions must work, and so must our air defence, which means we must continue to support those who defend our lives.”

Ukraine strikes oil refinery

Meanwhile, Russia’s defence ministry said its air defences had shot down 116 Ukrainian drones over Russian territory overnight.

The General Staff of the Ukrainian Armed Forces said Ukrainian forces had struck Russia’s Ryazan Oil Refinery, while Russian Telegram news channel Astra shared footage appearing to show a fire breaking out and plumes of smoke rising above the refinery.

Over the last few months, Ukraine has used long-range drones to target Russian refineries in an attempt to deprive Moscow of the oil export revenue it needs to continue the war.

Meanwhile, Kyiv and its Western allies say Russia is trying to cripple Ukraine’s power grid and deny civilians access to heat, light and running water in winter, which Ukrainian officials call “weaponising” the cold.

On Monday, Mr Zelenskyy will meet Sir Keir Starmer in London to discuss the ongoing negotiations mediated by the US, along with French President Emmanuel Macron and German Chancellor Friedrich Merz.

World

Gaza ceasefire negotiations at ‘critical moment’, says Qatar PM

Published

53 mins ago

December 6, 2025

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Gaza ceasefire negotiations at 'critical moment', says Qatar PM

Negotiations on a lasting ceasefire deal for Gaza are at a “critical moment”, the prime minister of Qatar, which has played a key role in brokering the deal, has said.

Sheikh Mohammed bin Abdulrahman said a definitive ceasefire could only happen with a full withdrawal of Israeli troops from the besieged enclave.

The first stage of a ceasefire deal was agreed in October, but violence in Gaza has not stopped. On Saturday alone, seven people were reportedly killed.

Palestinian local health authorities said the victims were from Beit Lahiya, Jabalia and Zeitoun in northern Gaza and included a 70-year-old woman who was killed by a drone strike.

The Israeli military said that in two separate incidents on Saturday, forces deployed in northern Gaza behind the so-called yellow line of withdrawal agreed in the ceasefire had fired on Palestinian militants who crossed the line, killing three.

The military was unaware of any drone strike, a spokesperson said.

The long-sought ceasefire – and the second one after a first deal fell apart earlier this year – began on 11 October after Israel and Hamas agreed to the first phase of Donald Trump’s 20-point peace plan.

Despite accusations by both sides of violations, talks on the next phase of the ceasefire deal began almost two weeks ago, with Turkish, Qatari and Egyptian officials meeting in Cairo to discuss the second part of the agreement, including deploying a stabilisation force and body to govern Gaza and oversee reconstruction.

“We are at a critical moment. It’s not yet there. So what we have just done is a pause,” PM al-Thani said during a panel discussion at the Doha Forum conference in Qatar.

“We cannot consider it yet a ceasefire. A ceasefire cannot be completed unless there is a full withdrawal of the Israeli forces – (until) there is stability back in Gaza, people can go in and out – which is not the case today.”

On Thursday, an Israeli delegation held talks in Cairo with mediators on the return of the body of the last hostage held in Gaza, which would complete an initial part of Mr Trump’s plan to bring an end to the two-year war.

Since the truce started, Hamas has returned all 20 living hostages and 27 bodies in exchange for around 2,000 Palestinian detainees and convicted prisoners.

Sports

Texas Tech captures Big 12 title, likely CFP bye

Published

1 hour ago

December 6, 2025

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Texas Tech captures Big 12 title, likely CFP bye

ESPN News Services

Dec 6, 2025, 03:31 PM ET

ARLINGTON, Texas — Cameron Dickey scored right after the first of linebacker Ben Roberts‘ two interceptions in the second half as No. 4 Texas Tech won the Big 12 championship game, and almost certainly locked up a first-round bye in the College Football Playoff, with a 34-7 victory over No. 11th BYU on Saturday.

After investing millions of dollars in the transfer portal, the Red Raiders (12-1) have their first Big 12 title — they are one of only six schools that have been part of all 30 Big 12 seasons. They also are going to the CFP for the first time, though their win prevented the Big 12 from getting a second team in the playoff.

Behren Morton, who didn’t play in Tech’s only loss at Arizona State, threw two touchdown passes to Coy Eakin, and Stone Harrington kicked four field goals for the Red Raiders.

The only losses by BYU (11-2) are to the Red Raiders, including 29-7 in Lubbock four weeks ago before four turnovers in the second half this time. The Cougars will fall out of the top 12 instead of moving up when the new CFP rankings come out Sunday. They likely needed to be in the top 10 for a playoff spot.

Roberts, one of the holdovers on the Tech defense along with fellow linebacker Jacob Rodriguez (13 tackles), got his first interception with about 3 1/2 minutes left in the third quarter when he reached up and deflected the pass by true freshman Bear Bachmeier. On the next play, Dickey took a direct snap and ran untouched 11 yards for a touchdown and 21-7 lead after making the 2-point conversion.

Harrington, who kicked a school-record five field goals against BYU last month, missed a 49-yard field goal attempt after Roberts jumped a route to make a one-handed interception in the fourth quarter.

But in between Roberts becoming the first player with multiple interceptions in one of the 24 Big 12 championship games, transfer Romello Height recovered when Bachmeier fumbled when being sacked. Harrington made a 44-yarder that time.

The Associated Press contributed to this report.