Fed Officials Still See Three Cuts This Year

Most officials penciled in three rate cuts this year in new projections, the same as in December. The central bank held steady its benchmark federal-funds rate in a range between 5.25% and 5.5%, a 23-year high.

The economic projections released Wednesday were the subject of intense focus on Wall Street because investors crave more information about how inflation readings for January and February influenced the Fed’s outlook. Stronger price pressures this year interrupted a streak of cooler reports in the second half of last year, raising questions over whether inflation will return to the Fed’s 2% target as quickly as officials and investors have anticipated.

Ahead of the release of those projections and the Fed’s policy statement, investors anticipated the Fed would cut rates three times this year, with better than even odds that the first move would occur by June. The Fed meets one more time before that, on April 30-May 1.

Fed Chair Jerome Powell is set to answer questions at a press conference at 2:30 p.m. Eastern time. He has suggested over the last few months that the central bank expects inflation to continue declining but that there may be bumps along the way.

Powell told lawmakers two weeks ago that he thought officials were “not far" from having the confidence needed to reduce rates, which could allay concerns that the Fed will unnecessarily weaken the economy.

But he also said it was important to confirm that recent progress on inflation wasn’t a fluke. “We don’t want to be in a situation where it turns out that the six months of good inflation data we had last year…didn’t turn out to be an accurate signal of where underlying inflation is," Powell said.

The fed-funds rate influences other borrowing costs throughout the economy, such as on mortgages, credit cards and business loans. The 30-year fixed-rate mortgage stood at roughly 6.7% last week, down from an October high of 7.8%, according to Freddie Mac.

The Fed began raising rates from near zero two years ago and lifted them at the fastest pace in 40 years to combat inflation that also soared to a four-decade high. Officials increased rates most recently in July.

At that time, many economists and some inside the Fed anticipated that the central bank’s rate increases to bring inflation down would lead to higher unemployment and a recession. But economic growth has shown surprising resilience even as wage and price increases have slowed thanks to healed supply chains and an influx of workers into the labor force.

Using the Fed’s preferred gauge, inflation excluding volatile food and energy prices has fallen to around 2.8% recently, down from 4.8% one year ago.

Since officials last met in January, economic data has done little to resolve a debate over whether the Fed should pre-emptively take back any of the increases it made last year, when many worried inflation might settle above 3%.

The inflation setback in January and February reversed a recent sharp slowdown and underscored the cautious stance many Fed officials adopted at their January meeting around cutting rates. It has likely emboldened those who think reductions won’t be warranted this year unless the economy slows sharply.

Higher housing prices and a stock market up nearly 20% since November are boosting wealth and thus supporting consumption, especially of high-income households. The price of bitcoin has recently surged to records, a sign of exuberant risk-taking.

Other reports, however, suggest consumer spending has cooled, and hiring surveys have been mixed. The most widely watched measure of employment growth has been solid, but earlier reports have been revised down by historically large margins. Wage growth has continued to slow and unemployment has steadily inched up, from 3.4% last April to 3.9% in February.

Those readings could provide fodder to Fed officials who are concerned about leaving rates at their current level for too long.

The stakes are high for Fed officials, who are trying to navigate two risks. One is that they ease too soon, allowing inflation to become entrenched at a level above their 2% target. The other is that they move too slowly and the economy crumples under the weight of higher rates.

Democrats are nervous that higher rates are sapping consumer sentiment and risking a slowdown ahead of November’s elections. This week, a handful of the most liberal lawmakers called on Powell to cut rates. Fed officials say they don’t weigh political considerations when deciding interest-rate policy.

President Biden earlier this month said he was hopeful the Fed would be able to follow through on its projections of lower rates. “I can’t guarantee it, but I’ll bet you those rates come down more, because I bet you that little outfit that sets interest rates is going to [bring them] down," he said at a campaign rally.

Write to Nick Timiraos at Nick.Timiraos@wsj.com