Despite "Modest Further Progress" on Inflation, the Fed Signalled Fewer Rate Cuts

Expectations were high for the latest Fed meeting, but not regarding interest rates. It was quite clear that the Fed would stand pat on rates this time, as it has since last summer. In fact, all 104 forecasts that make up the Bloomberg consensus were betting that rates wouldn't budge. Even the Fed press release issued at the end of the meeting showed very few changes compared to the one issued on May 1. In fact, aside from eliminating the May release's statements regarding changes to its balance sheet, the only other difference—which was nevertheless significant—was that there has been further, albeit modest, progress on inflation. The Fed also seems to think inflation is proving less sticky, which was confirmed by the May consumer price index data published this morning External link..

The lack of significant changes means attention has focused more on the Fed's latest forecasts. Projected economic growth and unemployment aren't that different from the projections released by the Fed in March. But it has bumped up its inflation forecast by 0.2 percentage points for 2024 and 0.1 percentage points for 2025. At the same time, key rate projections for the end of this year and for next year have been revised upward. The March dot plot suggested the Fed would make three 25‑point cuts in 2024. But now only one cut is expected. For 2025, the Fed is expecting four 25‑point cuts rather than the three cuts expected in March.

Despite recent encouraging figures, inflation is still high and a presidential election campaign is underway, so we clearly shouldn't expect this year's rate cut to land before the last meetings of the year. Powell and the other Fed officials want to see several more months of weaker inflation. They also want to have greater confidence that the labour market and the economy won't accelerate too quickly. Since our own forecasts assume that US economic growth will be somewhat more modest than the Fed anticipates, we still think there's room for the Fed to cut rates twice this year.

Interestingly, the Fed has been gradually raising its projected interest rate for the long term. It rose from 2.5% in December to 2.6% in March and is currently at 2.8% (graph). This suggests that the Fed believes the neutral interest rate could be higher in this economic cycle than recent forecasts expected.

Most forecasts expected the Fed to stay on the sidelines, and it has. The Fed is signalling only one rate cut in 2024, but economic conditions could open the door to two cuts, in November and December