Fed officials themselves projected in December that they would make three rate cuts this year as inflation steadily cooled. Yet lowering interest rates against such a robust backdrop could take some explaining. Typically, the Fed tries to keep the economy running at an even keel: lowering rates to stoke borrowing and spending and speed things up when growth is weak, and raising them to cool growth down to make sure that demand does not overheat and push inflation higher.
The economic resilience has caused Wall Street investors to suspect that central bankers may wait longer to cut rates — they were previously betting heavily on a move down in March, but now see the odds as only 50-50. But, some economists said, there could be good reasons for the Fed to lower borrowing costs even if the economy continues chugging along.
Here are a few tools for understanding how the Fed is thinking about its next steps.
Inflation will factor into Fed thinking.
The central bank will not release fresh economic projections at the meeting on Wednesday, but Jerome H. Powell, the Fed chair, could offer details about the Fed’s thinking during his news conference after the 2 p.m. policy decision.
One topic that he is likely to discuss is the all-important concept of “real” rates — interest rates after inflation is subtracted.
Let’s unpack that. The Fed’s main rate is quoted in what economists refer to as “nominal” terms. That means that when we say interest rates are set around 5.3 percent today, that number is not taking into account how quickly prices are increasing.