The Fed Keeps Rates Unchanged, Indicates Only One Cut This Year
Published by: 14.06.2024 11:14:39Key Points
- The Federal Reserve kept its key interest rate unchanged on Wednesday and signaled that it expects only one rate cut by the end of the year.
- The Federal Open Market Committee (FOMC) also indicated that the long-term interest rate is higher than previously suggested.
- “There has been a slight further progress toward the Committee’s 2 percent inflation objective over the past few months,” policymakers wrote in their statement.
The Federal Reserve left its key interest rate unchanged on Wednesday and signaled that it expects only one rate cut by the end of the year. Markets had hoped for more easing from the central bank, but FOMC policymakers, after their two-day meeting, removed two of the three rate cuts previously indicated in March. The committee also stated that the long-term interest rate is higher than previously suggested.
New forecasts released after this week’s two-day meeting indicated slight optimism that inflation is on track back to the Fed's 2% target, allowing for some policy easing later this year. “Inflation has declined over the past year but remains elevated,” the statement said, reiterating language from the previous statement. The only significant change in the new statement was: “There has been a slight further progress toward the Committee’s 2 percent inflation objective over the past few months.”
The phrasing cited a "lack of further progress" in controlling inflation. Traders were encouraged by these comments, and the S&P 500 reached a record high after the statement was released on Wednesday.
Aggressive Cuts in 2025
In its closely watched "dot plot" of individual participants' rate expectations, the committee indicated more aggressive cuts in 2025, with four reductions totaling one percentage point, up from three previously.
For the period through 2025, the committee now expects a total of five cuts totaling 1.25 percentage points, compared to six cuts in March. If projections hold, the federal funds rate would stand at 4.1% by the end of next year.
Another significant development came with the projection of the long-term interest rate, the level that neither supports nor restricts growth. It increased to 2.8% from 2.6%, suggesting the "higher rates for longer" narrative is gaining traction among Fed officials.
Another indicator of a tighter stance from central bankers is the dot plot, which showed that four officials are for no cuts this year, compared to two previously.
Increase in the Federal Funds Rate in the U.S. Since 2022
Key Points
Return to 2% Target
Elsewhere in the Summary of Economic Projections (SEP), FOMC participants raised their inflation outlook for 2024 to 2.6%, or 2.8% excluding food and energy. Both inflation projections were 0.2 percentage points higher than in March.
The Fed's preferred inflation gauge, the Commerce Department’s personal consumption expenditures (PCE) price index, showed readings of 2.7% and 2.8% in April. The Fed focuses more on core inflation as a better long-term indicator. The SEP suggests inflation will return to the 2% target, but not before 2026.
The decisions and informal forecasts of the 19 meeting participants come during a volatile year for markets and investors, who hoped the Fed would start easing after raising benchmark rates to the highest level in 23 years.
The federal funds rate, which sets overnight lending costs for banks but influences many consumer debt products, is targeted at a range of 5.25%-5.50%, following 11 rate hikes between March 2022 and July 2023.
Earlier in the day, as Fed officials prepared their economic and rate outlooks, the Bureau of Labor Statistics released the May consumer price index. The report showed inflation was stable for the month, while the annual rate fell from April to 3.3%.
At a press conference, Powell noted that the report was better than almost anyone expected and was considered in the FOMC's decision. “We see today’s report as progress and as, you know, building confidence,” Powell said. “But we do not see ourselves as having the confidence that would justify beginning to ease policy at this time.”
Inflation remains well above the Fed's 2% target, though significantly below the peak just above 9% nearly two years ago. Core readings, excluding food and energy, were 0.2% from the previous month and 3.4% from the previous year.
In the first quarter of 2024, economic data weakened from levels seen most of the previous year, with GDP growing at an annualized rate of just 1.3%. April and May brought mixed data, but the Atlanta Fed is tracking GDP growth at 3.1%, a solid pace given lingering recession fears that have plagued the economy for the past two years.
However, inflation data has been equally resilient, presenting challenges for central bankers.
The year began with market expectations for vigorous rate cuts, thwarted by firm inflation and statements from Fed officials that they were not convinced inflation was heading back to the target.
“This is a pivotal Fed meeting. They know conditions are improving, but they don’t need to rush to cut rates,” said David Russell, global head of market strategy at TradeStation. “A strong economy allows Jerome Powell to push inflation out of the system without hurting jobs. The Goldilocks scenario is emerging, but policymakers are cautious not to jinx it.”
Documents to download
K&L Rock also declares that it is not liable for any direct or indirect damage resulting from trading on the capital markets in general, and posts in discussions expressing the views of readers may not be in line with the operator's position and therefore cannot be regarded as its views.