The Federal Reserve on Wednesday kept the key interest rate unchanged and signaled that only one cut is expected before the end of the year.
With markets hoping for a more accommodative central bank, Federal Open Market Committee policymakers took two rate cuts off the table after their two-day meeting from three indicated in March. The committee also signaled that it believes the long-term interest rate is higher than previously indicated.
New forecasts released after this week’s two-day meeting showed slight optimism that inflation remains on track to return to the Fed’s 2% target, allowing for some policy easing later this year.
“Inflation has moderated over the past year but remains elevated,” it said in a post-meeting statement, echoing language from the last statement. In the only substantive change, the new statement followed: “In recent months, there has been modest further progress towards the Committee’s 2 percent inflation target.”
The previous language said there was a “lack of further progress” on inflation.
The committee, in its closely watched “bulk summary” of individual participants’ rate expectations, pointed to a more aggressive downward path in 2025, with four reductions reaching a full percentage point, out of three projected.
For the period to 2025, the committee now sees five total cuts equal to 1.25 percentage points, up from six in March. If projections hold, it would leave the benchmark federal funds rate at 4.1% through the end of next year.
Another important development occurred with the projection for the long-term interest rate, essentially a level that neither promotes nor constrains growth. That climbed to 2.8% from 2.6%, a sign that the higher-for-longer reading is gaining traction among Fed officials.
In a further indication of a dovish stance by central bankers, the dot plot showed four officials in favor of no cuts this year, up from two previously.
Elsewhere in the FOMC’s Summary of Economic Projections, participants raised their 2024 outlook for inflation to 2.6%, or 2.8% when excluding food and energy. Both inflation projections were 0.2 percentage points higher than in March.
The Fed’s preferred gauge of inflation is the Commerce Department’s personal consumption expenditures price index, which showed respective readings of 2.7% and 2.8% for April. The Fed focuses more on core inflation as a better long-term indicator. The SEP indicates that inflation will return to the 2% target, but not until 2026.
The decision and unofficial forecasts from the meeting’s 19 participants come amid a volatile year for markets and investors’ hopes that the Fed would begin easing after raising key rates to their highest level in about 23 years.
The federal funds rate, which sets overnight borrowing costs for banks but feeds many consumer debt products, is targeted at a range between 5.25%-5.5%, the result of 11 rate hikes between March 2022 and July 2023 .
Earlier in the day, as Fed officials were preparing their economic and rate outlooks, the Bureau of Labor Statistics released the consumer price index for May. The report showed that inflation was unchanged on the month, while the annual rate decreased from the rate in April to 3.3%.
That’s still well above the Fed’s 2% target, but also significantly below the peak of just over 9% seen nearly two years ago. Core readings, excluding food and energy prices, were 0.2% from last month and 3.4% from the year-ago period.
In the first quarter of 2024, economic data softened from where it had been for most of last year, with GDP growing at just an annual rate of 1.3%. April and May have been a mixed bag of data, but the Atlanta Fed is tracking GDP growth at 3.1%, a solid pace especially in light of lingering recession worries that have dogged the economy for the past two years.
However, inflation data has been equally resilient and has created problems for central bankers.
The year began with markets expecting a strong pace of rate cuts, only to be thwarted by steady inflation and statements by Fed officials that they are not convinced inflation is moving convincingly back toward target.
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