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Fed Likely to Scale Back Rate Cut Plans06/12 06:08

   Federal Reserve officials on Wednesday will likely make official what's been 
clear for many weeks: With inflation sticking at a level above their 2% target, 
they are downgrading their outlook for interest rate cuts.

   WASHINGTON (AP) -- Federal Reserve officials on Wednesday will likely make 
official what's been clear for many weeks: With inflation sticking at a level 
above their 2% target, they are downgrading their outlook for interest rate 
cuts.

   In a set of quarterly economic forecasts they will issue after their latest 
meeting ends, the policymakers are expected to project that they will cut their 
benchmark rate just once or twice by year's end, rather than the three times 
they had envisioned in March.

   The Fed's rate policies typically have a significant impact on the costs of 
mortgages, auto loans, credit card rates and other forms of consumer and 
business borrowing. The downgrade in their outlook for rate cuts would mean 
that such borrowing costs would likely stay higher for longer, a disappointment 
for potential homebuyers and others.

   Still, the Fed's quarterly projections of future interest rate cuts are by 
no means fixed in time. The policymakers frequently revise their plans for rate 
cuts -- or hikes -- depending on how economic growth and inflation measures 
evolve over time.

   But if borrowing costs remain high in the coming months, they could also 
have consequences for the presidential race. Though the unemployment rate is a 
low 4%, hiring is robust and consumers continue to spend, voters have taken a 
generally sour view of the economy under President Joe Biden. In large part, 
that's because prices remain much higher than they were before the pandemic 
struck. High borrowing rates impose a further financial burden.

   The Fed's updated economic forecasts, which it will issue Wednesday 
afternoon, will likely be influenced by the government's May inflation data 
being released in the morning. The inflation report is expected to show that 
consumer prices excluding volatile food and energy costs -- so-called core 
inflation -- rose 0.3% from April to May. That would be the same as in the 
previous month and higher than Fed officials would prefer to see.

   Overall inflation, held down by falling gas prices, is thought to have edged 
up just 0.1%. Measured from a year earlier, consumer prices are projected to 
have risen 3.4% in May, the same as in April.

   Inflation had fallen steadily in the second half of last year, raising hopes 
that the Fed could achieve a "soft landing," whereby it would manage to conquer 
inflation through rate hikes without causing a recession. Such an outcome is 
difficult and rare.

   But inflation came in unexpectedly high in the first three months of this 
year, delaying hoped-for Fed rate cuts and potentially imperiling a soft 
landing.

   In early May, Chair Jerome Powell said the central bank needed more 
confidence that inflation was returning to its target before it would reduce 
its benchmark rate. Powell noted that it would likely take more time to gain 
that confidence than Fed officials had previously thought.

   Last month, Christopher Waller, an influential member of the Fed's Board of 
Governors, said he needed to see "several more months of good inflation data" 
before he would consider supporting rate cuts. Though Waller didn't spell out 
what would constitute good data, economists think it would have to be core 
inflation of 0.2% or less each month.

   Powell and other Fed policymakers have also said that as long as the economy 
stays healthy, they see no need to cut rates soon.

   "Fed officials have clearly signaled that they are in a wait-and-see mode 
with respect to the timing and magnitude of rate cuts," Matthew Luzzetti, chief 
U.S. economist at Deutsche Bank, said in a note to clients.

   The Fed's approach to its rate policies relies heavily on the latest turn in 
economic data. In the past, the central bank would have put more weight on 
where it envisioned inflation and economic growth in the coming months.

   Yet now, "they don't have any confidence in their ability to forecast 
inflation," said Nathan Sheets, chief global economist at Citi and a former top 
economist at the Fed.

   "No one," Sheets said, "has been successful at forecasting inflation" for 
the past three to four years.

 
 
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