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  5. The Fed's next decision will likely mean Americans are going to wait a lot longer for any interest rate cuts

The Fed's next decision will likely mean Americans are going to wait a lot longer for any interest rate cuts

Ayelet Sheffey,Madison Hoff   

The Fed's next decision will likely mean Americans are going to wait a lot longer for any interest rate cuts
  • The Federal Reserve is likely to hold interest rates steady in its next decision on Wednesday.
  • It follows a strong jobs report and still-high inflation.

Americans shouldn't expect interest rate cuts to head their way anytime soon.

The Federal Open Market Committee is set to announce its next interest-rate decision on Wednesday, and following a hot jobs report, there's a strong chance rates will once again remain steady. According to the CME FedWatch Tool, which estimates the likelihood the Federal Reserve will change interest rates based on market predictions, there's a 99.4% chance rates will stay where they are as of Monday.

While the FOMC forecast three interest rate cuts this year in its December projections, the Fed chair, Jerome Powell, has reiterated throughout the year that nothing is set in stone, and the nation's central bank is willing to hold out as long as necessary until it feels confident the economy has cooled down enough.

"The first quarter in the United States was notable for its lack of further progress on inflation," Powell said during a panel in Amsterdam in May.

"We did not expect this to be a smooth road, but these were higher than I think anybody expected," Powell added. "What that has told us is that we'll need to be patient and let restrictive policy do its work."

The consumer price index increased 3.4% for the 12 months ending April, which means it's still elevated. The next CPI report is set to be published on Wednesday morning. And the US labor market saw some strength in May — the US economy added 272,000 jobs that month, which was way above economists' expectations.

"We have a very interesting labor market," Julia Pollak, the chief economist for ZipRecruiter, told Business Insider. "It's not the old normal. It's the new normal where employers are slower to fire, slower to hire, and workers are slower to switch jobs. That could be both a good thing and a bad thing.

"It may be bad, partly, because it is driven in part by uncertainty and fear and high interest rates holding back activity," Pollak added. "But, it's good in other ways because some of it has to do with the fact that jobs got better during the pandemic."

The unemployment rate also ticked up to 4.0% in May; the last time it was this rate was back in January 2022. Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, said May's rate was "still quite low historically."

Still, Joseph Briggs, an economist at Goldman Sachs, told BI that while rate cuts "have been delayed somewhat by the stickier Q1 inflation, we do think that we're still on track two this year starting in September."

Powell previously outlined what it would take to cut rates. During May's press conference following the FOMC's decision to hold rates steady, Powell said there were two paths that would give the Fed enough confidence to cut rates: more data to show inflation is getting closer to the Fed's 2% target or an "unexpected weakening in the labor market."

"If we did have a path where inflation proves more persistent than expected, and where the labor market remains strong but inflation is moving sideways, and we're not gaining greater confidence, that would be a case in which it could be appropriate to hold off on rate cuts," Powell said.

David Kelly, the chief global strategist at J.P. Morgan Asset Management, also told BI last week that two rate cuts could happen this year.

"I think that there'll be enough softness and coolness in the economy for them to begin to cut rates this year," Kelly said. "And if I had to bet, I bet that we will get two rate cuts, one in September and one in December."

Some Democratic lawmakers have been pushing the Fed to cut rates and give Americans some breathing room, especially after the European Central Bank cut rates earlier in June for the first time in five years. In a letter to Powell on Monday, Sens. Elizabeth Warren, Jacky Rosen, and John Hickenlooper pointed to the ECB's actions as a sign that it was time for the US central bank to follow suit.

"The Fed's decision to keep interest rates highs continues to widen the rate gap between Europe and the U.S, as the lower interest rates could push the dollar higher, tightening financial conditions," they wrote, adding: "You have kept interest rates too high for too long: it is time to cut rates."

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