Why are Fed rate cuts unlikely in the first half of the year?

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Fed rate cuts are unlikely in the first half of the year because inflation is still too high and policymakers see no need to ease yet.

The Federal Reserve is widely expected to keep interest rates at 5.25% to 5.50% at this week’s meeting, with markets assigning less than a 5.0% chance of a cut. Inflation is still above the Fed’s 2% long-term target, and officials have kept the benchmark rate at a 23-year high for months to slow demand and restrain price increases.
Inflation remains above the Fed’s target
The main reason cuts are being delayed is that inflation has not fallen back to 2%. The Fed has kept rates high specifically to curb stubborn price growth, and recent communication has carried a “decidedly hawkish lean,” according to EY chief economist Gregory Daco.
The US economy has held up better than expected
High rates have not slowed the economy as much as some policymakers expected. That resilience has reduced hopes for an earlier start to rate reductions, since stronger activity makes officials less willing to ease policy quickly.
Jerome Powell has signalled more time is needed
Fed Chair Jerome Powell has indicated the central bank should allow restrictive policy more time to work. With a clear majority of policymakers favouring two or fewer rate cuts, analysts such as Daco expect only two cuts this year, while some economists say there may be none in 2024.
Markets do not expect a cut before September
Traders see almost no chance of a cut at this meeting, and futures pricing put the probability below 5.0% as of this morning. Data from CME Group shows markets do not see a significant chance of a reduction until the Fed’s September meeting.

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Why are Fed rate cuts unlikely in the first half of the year?

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