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Rates Remain Steady as the Fed Indicates Only One Cut This Year

June 13, 2024
minute read

On Wednesday, the Federal Reserve decided to keep its key interest rate unchanged and projected just one rate cut by the end of the year, altering earlier expectations.

Key Developments

Following a two-day meeting, Federal Open Market Committee (FOMC) policymakers removed two anticipated rate reductions from the previous forecast, leaving only one cut on the table for the remainder of the year. Additionally, the committee indicated that the long-term interest rate is now expected to be higher than previously projected.

New forecasts released after the meeting reflected cautious optimism, suggesting that inflation is on track to return to the Fed’s 2% goal, potentially allowing for some easing of policy later in the year.

Economic Indicators

The post-meeting statement reiterated that while inflation has eased over the past year, it remains elevated. However, it highlighted recent modest progress towards the Fed’s 2% inflation objective. This was a shift from previous language which indicated a lack of further progress on inflation. These comments were well received by traders, with the S&P 500 reaching a record high on Wednesday following the statement's release.

Rate Projections

The FOMC’s “dot plot” of individual participants’ rate expectations revealed a more aggressive cutting path anticipated for 2025, with four rate reductions totaling one percentage point, up from three previously forecasted. For the period through 2025, the committee now envisions five total cuts amounting to 1.25 percentage points, down from six in March, potentially setting the federal funds rate benchmark at 4.1% by the end of next year.

A significant development was the adjustment of the long-run rate of interest, which increased to 2.8% from 2.6%. This change suggests that the higher-for-longer narrative is gaining traction among Fed officials. Additionally, the dot plot showed an increase in the number of officials favoring no cuts this year, up from two to four.

Inflation Outlook

The FOMC’s Summary of Economic Projections (SEP) adjusted the 2024 inflation outlook to 2.6%, or 2.8% excluding food and energy, both figures being 0.2 percentage points higher than in March. The Fed’s preferred inflation measure, the personal consumption expenditures price index, indicated respective readings of 2.7% and 2.8% for April. Core inflation, which excludes food and energy prices, is a focus for the Fed as a better long-term indicator. The SEP suggests inflation returning to the 2% target by 2026.

Market Reactions and Economic Data

The decision and forecasts come amid a volatile year for markets and investors’ hopes for the Fed to start easing after raising benchmark rates to their highest levels in 23 years. The federal funds rate currently targets a range between 5.25%-5.50% following 11 rate increases between March 2022 and July 2023.

On the same day as the Fed’s meeting, the Bureau of Labor Statistics released the consumer price index (CPI) for May, showing flat month-on-month inflation and an annual rate of 3.3%, down from April. During a press conference, Fed Chair Jerome Powell noted that this report exceeded expectations and influenced the FOMC’s decision, stating, “We see today’s report as progress and as, you know, building confidence, but we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”

Economic Conditions

Despite inflation being well above the Fed’s 2% target, it is significantly below the peak of over 9% seen two years ago. Core inflation rates for the prior month were 0.2% and 3.4% year-over-year. The first quarter of 2024 saw economic data soften, with GDP rising at an annualized pace of 1.3%. However, data from April and May were mixed, though the Atlanta Fed is tracking GDP growth at 3.1%, indicating a solid pace despite persistent recession worries over the past two years.

Analyst Insights

David Russell, global head of market strategy at TradeStation, commented on the Fed meeting, stating, “This is a nothing-burger Fed meeting. They know conditions are improving, but don’t need to rush with rate cuts. The strong economy is letting Jerome Powell wring inflation out of the system without hurting jobs. Goldilocks is emerging but policymakers don’t want to jinx it.” This sentiment reflects a cautious yet optimistic outlook as the Fed navigates the delicate balance between controlling inflation and sustaining economic growth.

Adan Harris
Managing Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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