Inflation has slowed. Now the Federal Reserve faces expectations for rate cuts

Average paychecks are still increasing at about 4% to 4.5% annually, and apartment rental prices are still rising faster than they did before the pandemic. Officials expect rent prices to cool as a slew of new apartment buildings are completed. But that has yet to show up in the official data. And some prices in the service sector, such as for restaurant meals, are still accelerating.

“We would argue we’re not out of the woods yet,” said Tiffany Wilding, a managing director and economist at PIMCO. “The Fed does not want to be Arthur Burns,” she added, referring to the Fed chair from the 1970s who is widely blamed for cutting rates too soon and allowing inflation to become more deeply entrenched in the economy.

At the same time, the Fed is grappling with an equivalent risk in the other direction: That it might keep its key rate too high for too long and potentially trigger a recession. Consumers spent at a healthy pace in the final three months of last year, but they could eventually pull back in the face of higher borrowing costs and prices that are still well above where they were three years ago.

“They run the risk of overstaying their welcome at high rates and slowing the economy down in a way that really isn’t necessary,” said Bill English, a finance professor at the Yale School of Management and a former Fed economist.

Still, the Fed could also accelerate its rate cuts later this year if the economy does weaken, just as it rapidly raised rates after waiting too long to start boosting them in 2022, said Claudia Sahm, founder of Sahm Consulting and a former Fed economist.

“I fully expect them to wait as long as humanly possible to cut rates,” she said. “The Fed excels at being behind the curve.”