Americans are getting closer to an interest rate cut — but it probably won't happen in the Fed's next big decision

• The Fed is expected to continue its pause on interest rate increases on Wednesday.
• In December, it penciled in three rate cuts for 2024.

The nation's central bank is gearing up to make its first big decision of 2024 — and while it likely won't be the interest rate cut many Americans are hoping for, it's set to bring them closer to that relief.

On Wednesday, the Federal Open Market Committee is expected to hold interest rates steady as it begins another year of working to get the US to the Fed's 2% inflation target. According to the CME FedWatch Tool, which estimates probabilities for changes in interest rates, there's a 97.9% chance the Federal Reserve will continue its pause on rate hikes and only a 2.1% chance of a cut as of Monday afternoon.

The Fed hinted at how many interest rate cuts Americans can expect this year in its December Summary of Economic Projections. The summary showed that the median FOMC member penciled in three cuts for 2024, and while it didn't specify when exactly they might happen, Fed Chair Jerome Powell also cautioned that the forecast is simply a projection, and it's subject to change.

"The forcefulness of our response to inflation also helped maintain the Fed's hard-won credibility, ensuring that the public's expectations of future inflation remain well-anchored," Powell noted in remarks during a December fireside chat at Spelman College. "Having come so far so quickly, the FOMC is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced."

Recent — and upcoming — economic data will help the central bank shape its decisions. New labor market data out this Friday will show how employment looked at the start of 2024, and some labor market experts already think 2024 will see a cooler job market. Unemployment was fairly low throughout 2023, ending the year with a 3.7% rate in December. Job growth in December also far surpassed economists' forecasts — with growth of 216,000 compared to a forecast of 170,000 for that month.

That continuing strength in the labor market does represent a slowdown from the hot post-pandemic recovery in 2022.

"Payroll employment rose by 2.7 million in 2023 (an average monthly gain of 225,000), less than the increase of 4.8 million in 2022 (an average monthly gain of 399,000)," a Bureau of Labor Statistics news release in early January said.

There are still challenges ahead for the Fed as the economy settles into a new normal. Nick Bunker, economic research director for North America at the Indeed Hiring Lab, told Business Insider in early January that "wage growth isn't slowing maybe as quickly as some people would've hoped."

Average hourly earnings grew 4.1% year over year in December, which isn't far off from the year-over-year changes seen in the months before.

The ongoing economic strength could also mean the Fed waits longer before cutting.

"There is nothing in the economy compelling the Fed to cut rates as soon as March — which investors have been pinning their hopes to — so expect the Fed to push back by emphasizing that inflation still needs to show further improvement," Greg McBride, chief financial analyst for Bankrate, said ahead of the Fed meeting.

Inflation as measured by the consumer price index, or CPI, has been far below its decades-high peak in June 2022. The year-over-year percent change in CPI was 3.4% in December 2023, surpassing the 3.1% in November but not as high as earlier in the year — like the 6.4% rate in January 2023.

At a time when inflation in the country is still persistently elevated, David Kelly, chief global strategist at J.P. Morgan Asset Management, wrote in a note that the Fed is unlikely to start cutting soon.

"The bottom line is that, while inflation continues to moderate in line with the Fed's hopes, economic growth has been stronger than they expected, long-term interest rates have fallen and the stock market has risen sharply, reducing the need for any early easing and increasing, in their minds, the risk that any such easing could restoke inflation," Kelly added. "That being said, data due this week could help trace out a likely path for the economy from here, providing guidance to the Fed and investors alike."

While a rate cut might not come as soon as many Americans want, some Democratic lawmakers continue pushing for the Fed to implement that relief as soon as possible. On Monday, Sens. Elizabeth Warren, John Hickenlooper, Jacky Rosen, and Sheldon Whitehouse urged Powell in a letter to "reverse the troubling rate hikes that have put affordable housing out of reach for too many."

"The Fed has already signaled its willingness to cut rates, and the market has responded accordingly," the lawmakers wrote. "Working families, already struggling with the cost of housing, need relief now."