BY CHRISTOPHER RUGABER

WASHINGTON (AP) — Federal Reserve officials signaled Wednesday that they still expect to cut their key interest rate three times in 2024, fueling a rally on Wall Street, despite signs that inflation remained elevated at the start of the year.

For now, the officials kept their benchmark rate unchanged for a fifth straight time.

Speaking at a news conference, Chair Jerome Powell said the surprising pickup in inflation in January and February hadn’t fundamentally changed the Fed’s picture of the economy: The central bank still expects inflation to continue to cool, though more gradually than it thought three months ago.

The recent high inflation readings followed six months of steady slowdowns in price increases. Economists and Wall Street investors were looking for some clarification Wednesday about how the latest inflation reports were viewed at the Fed.

The January and February data, Powell said, “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road towards 2%,” the Fed’s target.

In new quarterly projections they issued, the policymakers forecast that stronger growth and inflation above their 2% target level would persist into next year. Overall, the forecasts suggest that the Fed still expects an unusual combination: A healthy job market and economy in tandem with inflation that continues to cool — just more gradually than they had predicted three months ago.

For this year, the Fed projected that the economy will expand 2.1% — a big increase from its December forecast of just 1.4%. Yet at the same time, it still expects inflation to keep declining, though slowly.

Michael Gapen, chief U.S. economist at Bank of America, said the Fed’s updated projections suggest that it expects improvements in supply chains and the availability of workers to continue, allowing the economy to grow even as inflation slows to the Fed’s target. Rising immigration, for example, has made it easier for businesses to hire without having to rapidly raise pay.

“It looks to me like they’re embracing that supply-side story,” Gapen said. That means “you can cut while growth is solid, and you can cut while the labor market is strong.”

Rate cuts would, over time, lead to lower costs for home and auto loans, credit card borrowing and business loans. They might also aid President Joe Biden’s re-election bid, which is facing widespread public unhappiness over higher prices and could benefit from an economic jolt stemming from lower borrowing rates.

AP