The central bank expects interest rates to remain steady at the highest level since 2001

The Federal Reserve is set to announce a decision on whether to change its key interest rate on Wednesday, days after new government data showed the economy is cooling.

The slowdown has coincided with months of stubborn inflation, putting pressure on the central bank to keep interest rates high despite the risk of hampering economic activity with expensive borrowing costs.

Economists widely expect the central bank to keep interest rates unchanged. Such a move would push back rate cuts the central bank expects to make sometime this year.

At its most recent meeting, in March, the Fed stuck with its previous forecast of three rate cuts by the end of 2024, deciding to keep interest rates steady for the fifth time in a row.

That approach amounts to a long pause in the aggressive rate-hike cycle that began nearly two years ago when the central bank tried to curb rapid inflation.

Inflation is down significantly from a peak of 9.1%, but remains more than a percentage point above the central bank's target rate of 2%.

Interest rate cuts will lower the cost of borrowing for consumers and businesses, spurring a burst in economic activity through higher household spending and corporate investment.

But if the central bank cuts interest rates too quickly, there is a risk that inflation will rebound, as strong consumer demand on top of solid economic activity could lead to accelerating price increases.

Meanwhile the recent economic cooling will complicate the posture taken by the central bank.

The US economy slowed dramatically in early 2024, although it continued to grow at a solid pace, according to published data. US Department of Commerce Last week.

Gross domestic product, a measure of all goods and services produced in the economy, registered an annualized growth of 1.6% in the first three months of the year, the Commerce Department said this week.

That figure represents a steep slowdown from the 3.4% annualized rate measured in the final quarter of last year.

In March, ahead of the latest GDP data, Fed Chairman Jerome Powell said the combination of higher inflation and economic strength gave the central bank the opportunity to keep rates steady at much higher levels as the central bank faced little immediate risk of triggering a recession.

„In terms of inflation, it's too early to tell whether the latest readings reflect more than a bump,” Powell said. said Business conference at Stanford University.

„Given the strength of the economy and the progress in inflation, we have time to allow incoming data to guide our decisions on policy,” Powell added.

Economists who spoke to ABC News recently downplayed any alarm raised by last week's GDP finding, saying that resilient consumer spending would continue steady growth.

But if a gradual cooling persists with elevated inflation, the central bank will face a difficult situation, they added. That trend could force the Federal Reserve to keep interest rates high even as the economy falters.

The Fed Funds rate hovered between 5.25% and 5.5%, matching its highest level since 2001.