WASHINGTON: The Federal Reserve held interest rates steady on Wednesday and pushed out the start of rate cuts to perhaps as late as December, with officials projecting only a single quarter-percentage-point reduction for the year amid rising estimates for what it will take to keep inflation in check.
The markdown in the outlook for rate cuts, from three quarter-percentage-point reductions seen in the Fed’s March projections, occurred despite the central bank’s acknowledgement in its new policy statement of “modest further progress” towards its 2% inflation target – an upgrade from its May 1 statement. It likely removes the possibility of a rate cut before the Nov. 5 U.S. presidential election.
The move also coincided with an increase to 2.8% in the estimated long-run, or “neutral,” rate of interest from 2.6%, which indicates policymakers have concluded the economy needs more restraint to finish the battle against rising prices.
Recent progress has been slow, and Fed officials now project a slightly higher end-of-year inflation rate of 2.6% versus the 2.4% anticipated as of March.
Fed may remain on pause and pare back rate cut expectations
U.S. stocks held gains immediately following the release of the statement and updated projections while the U.S. dollar and U.S. Treasury yields pared losses.
Traders of rate futures continued to price in a September start to the Fed’s policy easing, with a second cut likely by the end of the year.
“The market cares more than the economy does about whether there are two cuts this year or only one,” said Brian Jacobsen, chief economist at Annex Wealth Management. “The Fed is basically rearranging the rate-cut deck chairs.”
While rate cuts are now seen getting a likely later start and a slower pace this year than investors have anticipated, the Fed’s policy rate is seen falling fast next year, with reductions of a full percentage point in both 2025 and 2026.
The Fed’s statement and new Summary of Economic Projections show a central bank wrestling over how to respond to data that many read as pointing to slower inflation – consumer prices in fact did not rise at all in May on a month-over-month basis, according to data released on Wednesday – but also to steady growth and job creation.
Higher neutral rate
The new projections show the economy is still expected to grow at a slightly above-trend 2.1% this year despite a sluggish first quarter, and the unemployment rate will remain at its current 4% through the year.
American Dollar Exchange Rate