The U.S. economy has seen a lot of progress on the inflation front, so why do experts think the Fed may hold off on cutting interest rates?

The short answer: the central bank is caught in a delicate balancing act. If the Fed cuts rates too soon, it risks re-igniting inflation. But if it waits too long, it could spark a recession.

“They want to get this right, and they are willing to be late rather than even on time,” according to Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co.

At the start of the year, investors were placing big bets on a March rate cut. But those expectations didn't pan out as inflation lingered higher than expected.

The latest CPI report for February showed that annual inflation rose 3.2%, slightly above expectations. Still, that’s a far cry from the 9.1% clip CPI reached in mid-2022.

A recent poll of economists conducted by Bloomberg Economics found that respondents aren’t placing a big emphasis on monthly CPI prints. They think the Fed is taking a more holistic approach as officials build “enough confidence” to justify rate cuts.

“Ultimately, we don’t expect the February CPI report to provide clear enough evidence of disinflation to boost the Fed’s confidence to cut rates,” Bloomberg economists Anna Wong and Stuart Paul said. “However, they could have enough confidence as soon as May—our base case for the first rate cut—as both inflation and the labor market cool further.”

Michael Gapen, chief U.S. economist at Bank of America, tends to agree.

“The Fed is seeking ‘greater confidence’ on inflation before it starts normalizing its policy stance. We expect progress on inflation in coming months will give the Fed enough confidence to begin a gradual cutting cycle in June,” Gapen explained.

As for the Fed, it remains purposely vague about what it plans to do next.

“Just a bit more evidence”

In congressional testimony earlier in March, Fed Chair Jerome Powell said the central bank needs “just a bit more evidence” that inflation is coming down to its 2% target. “We’re not far from it,” he said.

“We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell explained.

Reading between the lines, it’s clear that the Fed’s next move will be a rate cut. The only unknown is the exact timeline.

Although the odds of a March rate cut are around 1%, according to CME Group’s FedWatch Tool, that doesn’t mean Americans should ignore the Fed’s next meeting.

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

As for timelines, markets are now betting on June as the most likely start of rate cuts, according to FedWatch. Knowingly or not, millions of Americans are depending on the Fed to act sooner rather than later.

Americans left in the lurch

One of the biggest casualties of the Fed’s rate-hike campaign in 2022 and 2023 was consumer credit. Interest rates on credit cards have reached all-time highs, while mortgage affordability has plunged to four-decade lows.

The Fed’s policies directly impact the rates consumers pay for many loans, so it makes sense that millions are waiting on the central bank to lower interest rates.

As Creditnews reported, interest payments on non-mortgage credit reached a staggering $573.4 billion in January. That basically equals annual interest payments on mortgage debt, which amounted to $578.3 billion in the fourth quarter of 2023.

“The effects of high interest rates and persistent inflation may be starting to weigh on consumers, especially those already struggling to manage their finances,” said Can Arkali, a senior director at FICO, referring to the fact that the average American credit score declined in 2023 for the first time in a decade.

The one-two punch of high interest rates and persistent inflation means “People have less money to contribute to their financial goals like paying down debt,” according to Matt Schulz, the chief credit analyst at LendingTree.

It’s no wonder that roughly one in ten credit card accounts in the U.S. is in “persistent debt,” meaning more money goes toward paying interest and fees than the principal balance.

“The fees and interest keep people trapped there,” a CFPB spokesperson said.