5 things to know about the Fed’s March rate decision

The Federal Reserve is expected to hold steady Wednesday after a run of strong economic data delayed the central bank’s plans to cut interest rates this year. 

The Fed closed out 2023 with inflation falling steadily and the job market slowing slightly after the bank jacked interest rates up to a range of 5.25 percent to 5.5 percent.  

Members of the Federal Open Market Committee (FOMC), the Fed panel responsible for setting interest rates, projected in December that it would start cutting rates as soon as March with the economy on track for a soft landing. 

The economy, however, had other plans. 

Job growth has accelerated in 2024, with three straight months of job gains that have exceeded the expectations of economists. The jobless rate has also stayed below 4 percent for the longest stretch since the Nixon administration, and inflation has stalled at levels still too high for the Fed — and most Americans — to tolerate. 

“Inflation was hotter than expected in January and February, meaning [Wednesday’s] meeting is too early for the Fed to start reducing interest rates,” said Bill Adams, chief economist for Comerica Bank.

“But inflation, as well as its fundamental drivers (like the housing shortage) are gradually improving, and the Fed is set to start reducing interest rates at one of the next couple of meetings,” Adams continued. 

But that decision will bring backlash from the left, where a growing number of Democratic lawmakers and progressive nonprofits are urging the Fed to ease off the economy before it slows down too much. 

Here are five things to know about the Fed’s likely decision to hold rates steady. 

Job market is stronger than expected 

The job market has remained stronger than expected in recent months, despite the Fed’s decision to raise rates to a two-decade high. 

The U.S. economy added 275,000 jobs in February, blowing past economists’ expectations. Previous months have similarly surpassed projections, although the Labor Department revised December’s and January’s job gains downward to 290,000 and 229,000, respectively. 

The unemployment rate ticked up slightly to 3.9 percent last month but maintained the longest sub-4-percent streak in more than 50 years. 

While a strong job market is generally a positive sign, it could make the Fed hesitant to begin cutting rates, as the central bank’s rate hikes were intended to slow the economy and, in turn, inflation. 

Inflation is flatlining 

Despite easing significantly over the past two years, inflation remains higher than the Fed would like.  

The consumer price index, one closely watched gauge of inflation, peaked at a 40-year high of 9.1 percent in June 2022. By January 2024, it had fallen to 3.1 percent.  

However, inflation picked up again slightly in February, with consumer prices rising 0.4 points over the previous month and 3.2 percent year over year. 

A separate measure of inflation closely followed by the Fed, the personal consumption expenditures price index, fell to 2.4 percent in January. The central bank hopes to see this number on track to fall to 2 percent before declaring victory on inflation and beginning to cut rates. 

“[Chair Jerome Powell] and other Fed officials have repeatedly told us that in this cycle, the first rate cut hinges on more good data on inflation, and that alone. It’s not about the Fed’s forecast for inflation with the good data they already have,” wrote Claudia Sahm, an economic consultant and former Fed research director, in a Tuesday analysis. 

Fed officials have voiced caution 

Fed Chair Jerome Powell warned earlier this month that the central bank’s rate-setting committee is not yet confident that inflation has been sufficiently conquered to begin cutting interest rates. 

“The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” Powell told the House Financial Services Committee. 

While markets were previously hopeful for a March rate cut, Powell cautioned that this was “probably not the most likely case” following the Fed’s January meeting, at which the committee opted to hold rates steady once again. 

Minneapolis Fed President Neel Kashkari, who is not a voting member of the rate-setting committee, said last month that he anticipates two to three rate cuts this year. 

“If the labor market continues to be quite strong, that would give me confidence to say, ‘Well, we can dial things back quite slowly from here,’” he said at the time. “If we saw a material slowdown in the labor market, then that would say, ‘Hey, maybe we need to start cutting rates a little more quickly.’”

Kashkari’s projections largely fall in line with those from his fellow Fed officials in December. All but three officials said they anticipated at least two cuts in 2024, while the largest share anticipated three. The Fed is set to release new projections Wednesday. 

Wall Street is expecting fewer rate hikes 

Strong economic data and tough talk from Fed officials deflated Wall Street’s hopes for a March rate cut. 

Financial markets put the probability of a March rate cut at 75 percent in December, shortly after the FOMC projected a series of cuts for the following year, according to the CME FedWatch tool, which tracks changes in future markets tied to Fed moves. 

Those odds fell to 40 percent by the end of January and 15 percent by the start of March, before bottoming out this month. 

“It is fully expected that the Federal Reserve will leave interest rates unchanged at their March meeting,” said Stephen Rich, the chairman and CEO of Mutual of America Capital Management. 

“The consensus expectation is now that the Fed will first cut rates in June, which we believe is still a toss-up given sticky inflation along with a resilient consumer and job market,” Rich added. 

Progressives are pushing the Fed to cut anyway 

The Fed’s caution is likely to frustrate Democratic lawmakers and progressive activists, who ramped up pressure on the bank to cut rates after fiercely opposing previous hikes. 

Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) joined Rep. Pramila Jayapal (D-Wash.) and 20 more House Democrats in a Monday letter to the Fed arguing there is no longer any need for high interest rates, which have boosted pressure on U.S. households. 

“With core inflation already having come into line with the Federal Reserve’s target, today’s excessively contractionary monetary policy needlessly worsens housing market imbalances and the unaffordability of homeownership, creates risks for banking stability, and could threaten the achievements of strong employment and wage growth and its attendant reductions in economic and racial inequalities,” the lawmakers wrote. 

Democrats are also fearful that the Fed could trigger a recession by keeping rates too high for too long, upending years of strong job growth under President Biden shortly before the November election.

A recession could be ruinous for Biden’s chances of beating former President Trump, his expected Republican challenger, who is likely to blast the Fed for any move to ease rates under Biden.