The Federal Reserve kept its key interest rate unchanged on Wednesday and signaled it plans to cut rates just one more time before the end of the year.
After meeting for two days, Federal Open Market Committee policymakers reversed two of the three rate cuts they had signaled in March as markets expected more accommodative policy from the central bank. The committee also signaled that they believe longer-term interest rates are higher than previously suggested.
New forecasts released after a two-day meeting this week showed inflation on track to return to the Fed’s 2% target, allowing for some policy easing later this year.
“Inflation has eased over the past year but remains elevated,” the post-meeting statement said, echoing the language of the previous statement. The only substantive change was that the new statement added that “in recent months, there has been further moderate progress toward the Committee’s 2 percent inflation objective.”
The previous wording said “no further progress was made” on inflation.
Traders seemed encouraged by those comments, with the S&P 500 soaring to a record high on Wednesday after the statement was released.
Aggressive cuts expected towards 2025
The committee now expects a total of five rate cuts through 2025, up from six in March, for a 1.25 percentage point increase. If that forecast holds, it would leave the benchmark federal funds rate at 4.1% by the end of next year.
Another important development was in our forecasts for long-term interest rates, which are essentially neither encouraging nor inhibiting growth: Rates rose to 2.8% from 2.6%, signaling growing support among Fed officials for rates remaining high for the long term.
In a further indication of the central bank’s hawkish streak, the dot plot showed four officials were in favor of not cutting interest rates this year, up from two previously.
Return to the 2% target
In the FOMC’s Economic Outlook Overview, participants raised their 2024 inflation forecast to 2.6%, and to 2.8% excluding food and energy. Both inflation forecasts were 0.2 percentage points higher than in March.
The Fed’s preferred inflation measure is the Commerce Department’s Personal Consumption Expenditures Price Index, which was 2.7% and 2.8%, respectively, in April. The Fed favors core inflation as a better long-term indicator. The SEP indicates that inflation will return to its 2% target, but that will have to wait until 2026.
The decision and informal forecasts by the 19 meeting participants come at a time of a volatile year for markets and growing investor hopes that the Fed will begin easing monetary policy after raising its benchmark interest rate to its highest level in nearly 23 years.
The federal funds rate, which sets banks’ overnight borrowing costs but influences many consumer debt products, is targeted at a range of 5.25% to 5.50% after 11 rate hikes between March 2022 and July 2023.
On the same day that Fed officials were preparing their economic and interest rate outlooks, the Bureau of Labor Statistics released its Consumer Price Index for May, which showed inflation was flat from the previous month but the annual rate was down slightly from April to 3.3%.
Chairman Powell said at a press conference that the report was better than nearly everyone expected and that it was taken into account in the FOMC’s decision.
“We view today’s report as a step forward and as confidence-building,” Powell said. “But we don’t believe we have the confidence at this point to begin easing policy.”
Inflation remains well above the Fed’s 2% target but well below its peak of just over 9% recorded nearly two years ago. The core inflation rate, which excludes food and energy prices, was up 0.2% month-on-month and 3.4% year-on-year.
Economic data for the first quarter of 2024 was weaker than most of the previous year, with GDP growing at just a 1.3% annualized rate. Data was mixed in April and May, but the Atlanta Fed projected GDP growth at 3.1%, a solid rate given the persistent recession fears that have dogged the economy for the past two years.
But inflation data has been similarly robust, posing a problem for central banks.
Markets began the year expecting an aggressive pace of rate cuts, but expectations were hampered by persistently high inflation and comments from Fed officials that they were not confident inflation would return to their target.
“The Fed met today and got nothing accomplished. They realize that things are improving but they’re in no rush to cut rates,” said David Russell, head of global market strategy at TradeStation. “The strong economy has allowed Chairman Jerome Powell to keep inflation in check without hurting employment. A Goldilocks situation is emerging, and policymakers don’t want to spoil it.”
