As inflation progresses back to target, policymakers have been able to dial back their campaign to slow down the economy. Fed officials have raised interest rates to a range of 5.25 to 5.5 percent, up sharply from near-zero as recently as early 2022. But they have held borrowing costs steady at that level since July — forgoing a final rate increase that they had previously predicted — and have signaled that they could cut interest rates several times this year.
Now, investors are watching closely to see when, and how much, policymakers will lower borrowing costs.
Fed officials are toeing a delicate line as they decide what to do next. Keeping rates too high for too long could risk cooling the economy more than is strictly necessary. But lowering them prematurely could allow the economy to reheat, making it harder to bring inflation fully under control.
Fed policymakers meet next week, and officials are expected to leave interest rates unchanged when that gathering concludes on Jan. 31. Still, markets will closely watch a news conference with Jerome H. Powell, the Fed chair, for any hint at what might come next.
Mr. Powell may be offer insight into how the Fed is thinking about the interplay between growth and inflation. The economy is still growing at a solid pace and unemployment is very low, which many economic models would suggest could cause inflation to pick back up.