WASHINGTON – The Federal Reserve held its key interest rate steady Wednesday and opened the door to rate cuts but signaled that a March move is probably a long shot despite rapidly slowing inflation.

In a statement after a two-day meeting, the Fed removed its previous reference to “additional (rate increases).”

Instead, the Fed said it believes the risks to its goals of stable inflation and full employment "are moving into better balance.”

Will Fed rate cuts lift Americans?Fed interest-rate cuts are likely coming but may not offer much relief

The language affirms that the central bank is almost certainly done raising interest rates after 16 months of aggressive hikes to tame high inflation and a rate cut is now far more likely than an increase.

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But the Fed also suggested it’s in no rush to reduce rates and wants to make sure inflation has been subdued for the long term before acting.

“In considering any adjustments to the target range for the federal funds rate, the (Fed) will carefully assess incoming data, the evolving outlook and the balance of risks,” the central bank said.

It pointedly added, “The (Fed) does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

At a news conference, Federal Chair Jerome Powell said the language was intended to convey that a March rate cut hasn't been ruled out but is unlikely.

"The timing of (the first rate decrease) is linked to our gaining confidence that inflation is on a sustainable path down to 2%," Powell said. "I don't think it is likely (Fed officials) will reach that level of confidence by the time of the March meeting. It's probably not the most likely case."

Powell said officials are pleased that inflation has come down so swiftly over the past six months and aren't worried that the Fed's preferred inflation measure, now at 2.6%, will flare higher. But they want to see a longer string of data that shows inflation is continuing to ease and won't stabilize at the current level.

"It's a highly consequential decision to start the process of dialing back (economic) restraint," Powell said. "We want to get that right."

Kathy Bostjancic, chief economist of Nationwide, expects the first rate decrease in May.

"Inflation will be the key reason for them to reduce the fed funds target range, but we also expect slower employment and a mild recession unfolding mid-year," Bostjancic, who is among a minority of economists still forecasting a downturn in 2024.

The Fed on Wednesday broadly upgraded its economic outlook after a strong fourth quarter, noting that activity “has been expanding at a solid pace.”

What is the key interest rate?

Wednesday’s decision leaves the Fed’s benchmark short-term rate at a 23-year high of 5.25% to 5.5% following a flurry of aggressive hikes aimed at taming the nation’s sharpest inflation spike in four decades. The central bank has left the federal funds rate unchanged since July as consumer price increases have slowed more dramatically.

By standing pat for a fourth straight meeting Wednesday, the Fed provides another reprieve to consumers who still face higher borrowing costs for credit cards, adjustable-rate mortgages and other loans since officials launched their inflation fight in early 2022. Yet many Americans, especially seniors, are being helped by healthy bank savings yields after years of meager returns.

Are rate cuts coming?

There’s little doubt that a slide in rates is on the way. In December, the Fed forecast three quarter-point cuts this year, more than anticipated, further stoking an S&P 500 stock index that was already vaulting toward a new record on the pullback of inflation and the prospect of lower rates. Futures markets now foresee as many as six rate cuts.

But exactly when the Fed will begin to reverse the historic run-up in borrowing costs and how swiftly it will do so is a thornier question.

Policymakers have been wrestling with how to respond to the unusual tandem of tumbling inflation and a solidly growing economy. Normally, easing price increases are triggered by substantially slowing consumer demand and economic growth.

This time is different. Pandemic-related product and labor shortages sparked the inflation spike and their resolution has allowed price gains to stabilize, economists say.

What is the inflation rate right now?

In December, the Fed’s preferred inflation measure – the personal consumption expenditures index – rose 2.6% annually, down from a high of 7% in summer 2022. A core measure that excludes volatile food and energy items and that the Fed watches more closely dipped to 2.9%, the lowest since March 2021 but still above officials’ 2% goal.

And yearly wage growth, which feeds into inflation, fell to 4.3% in the last three months of 2023 from 4.5% the prior quarter, according to a key gauge of pay increases released Wednesday.

Is the US economy strong right now?

Meanwhile, though, the economy grew at a sturdy 3.3% annual rate in the fourth quarter and a healthy 2.5% for all of 2023. Americans have opened their wallets, shrugging off still elevated prices and borrowing costs, largely as a result of hefty pay increases. And while employment growth has been gradually slowing, the economy added a robust 216,000 jobs in December.

Many forecasters believe growth will slow to just under 2% this year as households feel the strains of high interest rates, record credit card debt and dwindling pandemic-related savings. That would still be a respectable showing, but some experts continue to predict a mild recession.

A few months ago, Powell said officials were concerned that a persistently strong economy and job market could lead the Fed to raise rates or keep them high on the risk they could push inflation higher even if price gains were currently moderating. But Powell said officials now believe that in the post-pandemic environment, a strong economy and falling inflation can co-exist. A healing supply chain and a recovering labor supply have allowed price increases to moderate even as the economy has stayed resilient, he said.

"We don't see that as a problem," he said.

The favorable economy also means the Fed can afford to be patient as it weighs rate cuts, some officials say. In a recent speech, Fed Governor Christopher Waller said the central bank should move “methodically and carefully,” adding, “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”

Could inflation go back up?

Barclays is among economic research firms that also note it’s too soon to proclaim victory over inflation. Wage growth has moderated as a rebound in immigration has expanded the pool of available workers. But there are signs the increase in the labor supply has peaked, meaning the upward pressure on wages could resume. And while the gauge released Wednesday showed easing pay increases, another measure of hourly pay gains ticked up in December.

Meanwhile, there’s a risk that the supply chain snarls that triggered inflation in the early days of the pandemic could flare again because of military conflict in the Red Sea, Barclays says.

Yet there may also be risks to moving too slowly. The inflation drop-off means interest rates after adjusting for inflation are more restrictive than the Fed would like, potentially hampering the economy more than is needed to bring price gains under control.

And there are signs the labor market is wobbling, says Goldman Sachs economist David Mericle.

Just a handful of industries have added jobs recently, including government, health care and restaurants, and hotels. Some of those sectors aren’t as sensitive to the ups and downs of the economy and interest rates. But they’re also volatile.

Waiting too long to cut rates could cause "weakening economic activity and employment," Powell acknowledged.

For more on interest rates and the economy, keep reading:

Will interest rates fall on my credit cards?

Credit card interest rates are unlikely to fall significantly in the months to come, experts say, because banks will be loath to reduce them.  

Credit card debt is a record $1.08 trillion, and delinquency rates have been rising. If the economy slows sharply, delinquencies may turn into charge-offs that banks take as losses.

If you have good credit, though, you may get lucky: The credit card marketplace remains competitive, and card issuers may offer attractive rates to applicants with high credit scores. 

– Medora Lee

How will the Fed’s actions (or inaction) affect the stock market?

Stocks were up and down on Wednesday. Over the longer term, however, the prospect that the Federal Reserve is done raising interest rates has been a boon for the stock market and for your 401(k).

Over the last 10 rate hike cycles, dating to 1974, the S&P 500 index rose an average of 14.3% in the 12 months that followed the Fed’s final rate increase, according to an analysis by Ryan Detrick, chief market strategist at Carson Group.

The message? Investors really like it when the central bank stops beating them over the head with rate hikes. That may explain why the market has hit record territory in recent weeks. 

– Paul Davidson

How do Americans feel about the economy?

Consumer confidence in the U.S. economy, while low, reached its highest point in two years on the latest Gallup Economic Confidence Index, released Tuesday.

Polling in January put the Gallup index at -26 on a scale that runs from -100 to +100, summarizing whether America thinks the economy is getting better or worse. 

The index hovered around plus-40 just before the 2020 pandemic shutdown, then plummeted to a low of -58 in June 2022, when inflation reached a historic high. The metric has gradually recovered in the months since.

– Daniel de Visé

Federal Reserve meetings 2024

The Federal Open Market Committee next meets on March 19 and 20. The committee is the Fed branch that sets monetary policy.

Here are all of the Fed meetings planned for 2024, including this week’s session:

Jan. 30-31

March 19-20

April 30- May 1

June 11-12

July 30-31

Sept. 17-18

Nov. 6-7

Dec. 17-18

– Daniel de Visé

How likely is a recession in 2024?

Forecasters expect the economy to grow 1.6% this year, according to a recent survey by Wolters Kluwer Blue Chip Economic Indicators. That kind of growth likely means the Fed will have achieved a coveted “soft landing” by restraining the economy enough to tamp down inflation without triggering a recession.

Such an outcome could boost President Joe Biden's reelection chances in November, while a slump could deal a significant blow. The surveyed economists reckon there’s a 42% chance of a downturn in 2024 - still historically high, but lower than earlier estimates.

Several experts upgraded their outlook after retail sales over the holidays came in stronger than expected, giving the economy more momentum heading into the current quarter.

– Paul Davidson

What is the current inflation rate?

In December, overall prices rose 3.4% from a year earlier, according to the Labor Department’s consumer price index. On a monthly basis, costs increased 0.3% from November to December after virtually flatlining in the previous two months.

Inflation is easing from its 40-year high of 9.1%, reached in June 2022, but the downward path has been bumpy. A more gradual descent in consumer prices could prompt the Federal Reserve to keep interest rates higher for longer. The Fed has set a target rate of 2% annual inflation.

– Paul Davidson