Federal Reserve keeps interest rates unchanged, suggests only one cut expected this year

The Federal Reserve announced that it will keep its key interest rate unchanged and indicated that only one rate cut is expected before the end of the year. The Federal Open Market Committee policymakers have removed two rate reductions from the three indicated in March, signaling a slightly more optimistic outlook on inflation reaching the Fed’s 2% target. The new forecasts suggest that inflation is on track to head back to the desired level, allowing for some policy loosening later in the year.

The committee’s Summary of Economic Projections revealed a projection of five total cuts through 2025, totaling 1.25 percentage points – down from the six indicated in March. This would leave the federal funds rate benchmark at 4.1% by the end of next year. Additionally, the projection for the long-run rate of interest was raised to 2.8% from 2.6%, indicating a higher-for-longer narrative gaining traction among Fed officials. The dot plot showed four officials in favor of no cuts this year, signaling a hawkish sentiment within the central bank.

Participants also raised their 2024 outlook on inflation to 2.6%, or 2.8% when excluding food and energy – both 0.2 percentage points higher than in March. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, showed readings of 2.7% and 2.8% for April, focusing more on core inflation as a long-term indicator. The SEP indicates inflation is expected to return to the 2% target, but not until 2026, highlighting the central bank’s cautious approach.

The decision and forecasts come during a volatile year for markets, with investors hoping for easing after Federal Reserve raised benchmark rates to their highest level in 23 years. Fed officials factor in economic data and rate outlooks in their decision-making process, with the latest consumer price index showing flat inflation for May and a lower annual rate of 3.3% compared to April. Federal Reserve Chair Jerome Powell viewed the data as progress but stated that the confidence to loosen policy was not yet warranted.

Despite signs of improvement in economic data, the Fed remains cautious about rushing with rate cuts due to sticky inflation. The strong economy is allowing Powell to address inflation without harming jobs, with GDP growth tracking at a solid pace. Market experts view the recent Fed meeting as uneventful, with policymakers preferring to wait for more concrete signs of inflation meeting the target. This cautious approach reflects the Fed’s commitment to navigating through uncertain economic conditions while maintaining stability in the markets.