WASHINGTON — After Federal Reserve officials meet this week, a statement they will issue may suggest that they've seen meaningful progress on inflation this year — a prelude to eventual interest rate cuts.
Yet it's hard to say, because the officials themselves may not know for sure until they begin their meeting. That's because the government's latest snapshot of U.S. inflation will be released Wednesday morning, just before the Fed begins the second day of its policy discussions.
One key issue is a sentence the Fed added to its statement after its last meeting May 1: It said "there has been a lack of further progress" in bringing inflation back to the central bank's 2% target.
Inflation had come in uncomfortably high in the first three months of this year, dimming hopes that it would continue to steadily cool, as it had in the second half of last year.
In April, though, consumer inflation did resume slowing, if only slightly. And if the May inflation report being released Wednesday shows further signs of improvement, it's possible the Fed could drop that sentence from its statement. It would be an encouraging sign that the policymakers may cut their benchmark rate within a few months. Rate cuts would eventually lead to lower costs for mortgages, auto loans and other forms of consumer and business borrowing.
But whether or not the sentence is dropped or altered, most economists think no rate cuts are likely before September at the earliest. Chair Jerome Powell is likely to underscore at a news conference Wednesday that the policymakers will need to see several more months of low inflation readings before they would consider reducing their key rate.
A Fed rate cut might give the economy a modest lift, which would be welcomed by President Joe Biden's re-election campaign, which is struggling to counter many voters' unhappiness with the inflation spike of the past several years. Though consumer inflation has slowed dramatically since peaking at 9.1% in mid-2022, it was still 3.4% in April, well above the Fed's target.
The Fed would reduce rates faster if growth were to stall and companies were to lay off many workers. But on Friday, the government reported a robust job gain in May, with employers across a range of industries adding jobs. The report led Wall Street traders to downgrade their forecast for Fed rate cuts to just one this year, from two.
The Fed is set Wednesday to keep its benchmark rate unchanged at roughly 5.3%, its highest level in 23 years, where it has stood since July. The policymakers will also issue updated economic projections, which are expected to show that they envision one or two rate cuts by year's end, down from a forecast of three in March.
At his news conference, Powell will likely reiterate that Fed officials need more confidence that inflation is returning to 2% before they would consider rate cuts, and that this will likely take additional time.
"The Fed's narrative is going to be very similar to what we've been hearing: 'We've made progress bringing down inflation; we're not in a hurry to cut rates,' " said Nathan Sheets, a former senior economist at the Fed who is global chief economist at Citi.
Another issue Powell may address is whether the economy is starting to weaken. Growth slowed sharply in the first three months of the year, to an annual rate of just 1.3%, down from 3.4% in last year's final quarter.
The number of open jobs fell in April to the lowest level in three years, though the number remains high by historic standards. And consumers actually cut back on their spending in April, after adjusting for inflation, a sign that high prices and elevated interest rates are pressuring Americans' finances.
Though May's solid job growth helped assuage some of those worries, the unemployment rate edged up for a second straight month, to 4%.
Such tentative signs of weakness may help clarify an ongoing debate among Fed officials: Just how much are higher rates hurting the economy? Policymakers jacked up borrowing costs over the past two years with the goal of slowing spending enough to tame inflation.
Given last year's strong growth and substantial job gains earlier this year, some officials had come to doubt that their rates were high enough. Minutes of the Fed's most recent meeting suggested that some officials had even expressed openness to additional rate hikes.
A cooling economy "would reinforce their story that (interest rate) policy is restrictive," said Donald Kohn, a former vice chair of the Fed's Board of Governors who is a senior fellow at the Brookings Institution. "Which is what people were kind of doubting — myself included — for a while when everything was coming in so strong."
Last month, John Williams, president of the Fed's New York branch, said there was "ample evidence" that higher rates were restraining the economy. Home sales have tumbled. And spending on appliances, furniture and other high-priced goods has slowed.
The Fed's cautious approach to rate cuts stands in contrast to some of its overseas counterparts. On Thursday, the European Central Bank announced its first rate reduction in five years, citing the progress it's made in slowing price increases. Inflation has fallen from a peak of 10.6% to 2.6% in the 20 countries that use the euro currency.
Canada's central bank also reduced rates last week. The Bank of England will meet Thursday, though it's not clear whether it will cut. The Bank of Japan is the only major central bank to raise rates, which it's done in response to an uptick in prices after decades of deflation.