The Federal Reserve kept its key interest rate unchanged on Wednesday and said it expected to cut rates only once before the end of the year.
Federal Open Market Committee policymakers canceled two rate cuts from their planned rate cuts in March after a two-day meeting as markets look for more easing from the central bank. The committee also said it believed long-term interest rates were higher than previously expected.
New forecasts released after this week’s two-day meeting show that inflation is still on track to return to the Fed’s 2% target, allowing the central bank to ease some policy later this year.
“Inflation has eased over the past year but remains high,” the statement after the meeting said, echoing the language of the previous statement. The only substantive change in the new statement is this: “In recent months, the Committee has made modest further progress toward achieving its 2 percent inflation objective.”
Previous language said there was a “lack of further progress” on inflation.
Traders seemed buoyed by the comments, with the S&P 500 jumping to a record on Wednesday following the announcement.
Significant cuts expected in 2025
The commission now expects five cuts totaling 1.25 percentage points through 2025, down from six in March. If the forecast holds true, the benchmark federal funds rate will remain at 4.1% by the end of next year.
Another major development is the forecast for long-term interest rates, essentially at a level that neither promotes nor constrains growth. The ratio rose to 2.8% from 2.6%, suggesting that the longer-term higher narrative is gaining traction among Fed officials.
The dot plot shows that four officials support no interest rate cuts this year, a number that further demonstrates the hawkish leanings of the central bank president, compared with only two officials previously.
Return to 2% target
In the FOMC summary of economic forecasts, participants raised their 2024 inflation outlook to 2.6%, or 2.8% if food and energy are excluded. Both inflation forecasts are 0.2 percentage points higher than in March.
The Fed’s preferred inflation indicator is the Commerce Department’s The personal consumption expenditure price index in April was 2.7% and 2.8% respectively. The Fed is paying more attention to core inflation as a better long-term indicator. The SEP shows inflation will return to the 2% target, but not until 2026.
The decisions and informal forecasts from the 19 meeting participants come amid a tumultuous year for markets, with investors hoping the Fed will begin easing monetary policy after raising its benchmark interest rate to the highest level in about 23 years.
The federal funds rate, which sets overnight borrowing costs for banks but affects many consumer debt products, has a target range of 5.25%-5.50%, the result of 11 rate hikes between March 2022 and July 2023.
Earlier in the day, the U.S. Bureau of Labor Statistics released its May consumer price index as Fed officials prepared the economic and interest rate outlook. The report showed that the inflation rate remained flat this month, while the annual rate dropped slightly to 3.3% from April.
Powell said at a press conference that the report was better than almost everyone expected.
“We view today’s report as progress and confidence building,” Powell said. “But we do not believe we have the confidence to begin easing policy at this time.”
Inflation remains well above the Fed’s 2% target and well below its peak of just over 9% nearly two years ago. The core index, which excludes food and energy prices, rose 0.2% from the previous quarter and 3.4% from the same period last year.
In the first quarter of 2024, economic data was weaker than most of last year, with annualized GDP growth of only 1.3%. Data for April and May were mixed, but GDP growth tracked by the Atlanta Fed was 3.1%, a solid pace, especially given the ongoing recession concerns that have plagued the economy over the past two years.
However, the inflation data has also been resilient and posed problems for central bankers.
Market expectations at the start of the year that the Fed would cut interest rates sharply were thwarted by high inflation and Fed officials expressing disbelief that inflation would convincingly return to target.
“The Fed meeting means little. They know things are improving, but they don’t need to rush to cut rates,” said David Russell, head of global market strategy at TradeStation. “A strong economy allows Jerome Powell to push inflation without hurting jobs.” Bloat is crowding out the system, but policymakers don’t want to jinx it.”
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