Hot inflation likely to delay interest rate cuts. Here's what to expect

Consumers saddled with high credit card and mortgage rates held onto a source of solace in recent months: A forecast from the Federal Reserve promising long-awaited interest rate cuts.

The economy has refused to cooperate, however, casting that financial relief into doubt.

Fresh price data released on Wednesday marked the third consecutive month of firmer-than-expected inflation; while a blockbuster jobs report last week revealed that employers are hiring with gusto.

The hot economy casts doubt over interest rate cuts, likely delaying their widely anticipated start this summer and possibly removing them entirely from the Fed's calendar this year, some economists told ABC News, while acknowledging that multiple rate cuts remain within the realm of possibility.

"The future is uncertain -- I wouldn't bet the farm," Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former Federal Reserve official, told ABC News. "You might get no cuts this year or you might get three or four cuts."

In December, when the Fed announced plans for eventual rate cuts, prices were cooling steadily amid robust economic growth. The trend elicited a burst of optimism about the chances for a "soft landing," in which inflation returns to normal while the economy avoids a recession.

Price increases have cooled dramatically from a peak of about 9%, but inflation has stalled in recent months, hovering more than a percentage point higher than the Federal Reserve's target rate of 2%.

Meanwhile, the economy has continued to run hot. Breakneck hiring and robust economic growth have rebuked fears of a recession.

That combination of elevated inflation and economic fortitude offers the Fed an opportunity to hold rates steady at highly elevated levels, since the central bank runs little immediate risk of triggering a downturn, Fed Chair Jerome Powell said last week, before the latest inflation reading.

"On inflation, it's too soon to say whether the recent readings represent more than just a bump," Powell told a business conference at Stanford University.

"Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy," Powell added.

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

Interest rate cuts would lower borrowing costs for consumers and businesses, potentially triggering a burst of economic activity through greater household spending and company investment.

But the Fed risks a rebound of inflation if it cuts interest rates too quickly, since stronger consumer demand on top of solid economic activity could lead to an acceleration of price increases.

At the outset of this year, many economists and traders expected interest rate cuts to begin in June. However, the cautious approach from the Fed has largely nixed expectations of a rate cut in the coming months.

"At this point, a June rate cut seems to be out of the picture," Yeva Nersisyan, a professor of economics at Franklin & Marshall College, told ABC News. "The Fed is signaling that it doesn't want to lower rates."

Bret Kenwell, U.S. investment analyst at eToro, agreed. The latest higher-than-expected inflation reading delivered a "blow" to plans for a rate cut in June, he told ABC News in a statement.

"There's growing uncertainty about when the first cut of 2024 will come," he added.

Some economists said they doubt whether an interest rate cut would happen this year at all. Persistently elevated inflation could push the Fed to abandon its forecast of lower rates, they said, while a commitment to political neutrality may foreclose a move ahead of the November election.

"There is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the US election will begin to intrude with Fed decision making," Seema Shah, chief global strategist for principal asset management at investment firm Edelman Smithfield, told ABC News in a statement.

Still, some observers have retained expectations of a rate this summer, citing progress made in the Fed's inflation fight over the past two years. In a note to clients obtained by ABC News, Bank of America said it still predicts a rate cut in June.

The firm, however, acknowledged the threat posed by the latest inflation data, saying it "points to significant risk of a delay to the start of Fed easing."