Eight months after raising interest rates to a two-decade high, Federal Reserve Chair Jerome Powell and his colleagues are moving closer to dialing back their inflation fight.

In congressional testimony last week, Powell emphasized the central bank needs “just a bit more evidence” inflation is headed toward its 2% target before lowering borrowing costs. “We’re not far from it,” he said.

The Fed is widely expected to hold interest rates steady for a fifth straight meeting when policymakers gather March 19-20. Much of the focus by investors will be on the Federal Open Market Committee’s quarterly forecasts for rates, including whether fresh employment and inflation figures have prompted any changes.

Should Fed officials pencil in three quarter-point reductions for 2024, it will set the stage for a potential cut in June as investors expect.

The Fed’s March message will be: “We’re going in the right direction,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. “They are not that far from having the appropriate amount of confidence.”

Policymakers voted unanimously to leave interest rates unchanged in a range of 5.25% to 5.5% in January, and Powell and other Fed officials have said a rate cut in March is unlikely.

Part of the reason officials can afford to take their time is because economic growth remains solid and the labor market continues to generate a healthy number of jobs, including an above-forecast 275,000 in February.

That report also included signs of continuing moderation, with downward revisions to prior months’ gains, slowing wage growth, and an increase in the unemployment rate to a two-year high of 3.9%.

“The data probably took some air out of the danger of the Fed having to delay and scale back cutting,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “Powell’s assessment of being ‘not far’ from enough confidence to cut is still intact.”

The Fed will get a key inflation metric before the meeting. The consumer price index likely remained stubbornly elevated at 3.1% compared to a year ago, according to economists surveyed by Bloomberg News. An upside surprise in January jolted central bankers, and another surprise in February would have the potential to shift Fed officials’ view of the 2024 rate path.

What Bloomberg Economics Says…

“The FOMC has been very reactive to negative data surprises, as evidenced by Fed Chair Jerome Powell’s quick dovish pivot in December after a slight weakening in the labor market at the time. Given our expectation that the labor market will cool more quickly ahead, we expect the Fed to cut rates in May — earlier than market expectations for June.”

— Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou

For the full note, click here.

Fed officials focus on a separate inflation index, measured by personal consumption expenditures, which showed a 2.4% rate in January and 2.8% excluding food and energy. Beyond the headline numbers, some Fed officials are concerned by the narrowness of recent improvement, notably in goods.

Dot Plot

The Fed’s “dot plot” — a collection of policymakers’ individual forecasts for interest rates — showed an unusually wide dispersion in December. It would take just two policymakers to change their forecasts to move the median.

Minneapolis Fed President Neel Kashkari said Wednesday that he was thinking about reducing his forecast for rate cuts to potentially one fewer this year, adding, “It is going to be determined by the inflation data that we see.”

While Powell has maintained a strong control of the committee, with no dissents for more than a year despite a changing and uncertain outlook, he could face a challenge in keeping everyone on board as the central bank pivots to cuts.

“We are starting to see cracks in the consensus on how to execute on cuts,” said Diane Swonk, chief economist at KPMG LLP. “The consensus on the trajectory may not be as tight as one would expect so close to an expected cut.”

The Fed will also begin in-depth discussions of the ongoing reduction of its $7.5 trillion balance sheet, a process known as quantitative tightening, at the upcoming meeting. No decision regarding the possible tapering or slowing of asset runoff is expected, though Powell may use his press conference to comment on the progress of those conversations.