Fed Keeps Rates Unchanged, Signals 1 Rate Cut This Year

Federal Reserve Chair Jerome Powell announces that interest rates will remain unchanged during a news conference at the Federal Reserves’ William McChesney Martin building in Washington on June 12, 2024. Kevin Dietsch/Getty Images

The Federal Reserve left its key interest rate policy unchanged on June 12, while officials at their latest monetary policy meeting predicted one rate cut this year.

At the conclusion of their two-day Federal Open Market Committee (FOMC) monetary policymaking meeting, the Fed voted to leave its policy rate at a range of 5.25 percent to 5.5 percent.

In a post-meeting statement, the monetary authorities noted that “there has been modest further progress toward” achieving the central bank’s 2 percent inflation target.

“Inflation has eased over the past year but remains elevated,” the FOMC statement said, adding that officials will not cut rates until sufficient evidence supports such a decision.

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement said. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Additionally, the rate-setting committee members agreed to continue reducing its holdings of Treasury securities and mortgage-backed securities.

Speaking to reporters at the post-FOMC policy meeting, Fed Chair Jerome Powell noted that it is too early to determine whether current monetary policy is “sufficiently restrictive.”

“The question of whether it’s sufficiently restrictive is going to be one we know over time,” he stated. “But I think for the reasons I talked about at the last press conference and other places, I think the evidence is pretty clear that policy is restrictive and is having, you know, the effects that we would hope for.”

Summary of Economic Projections

According to the Summary of Economic Projections (SEP), the Fed now expects just one rate cut this year, leaving the median policy rate at 5.1 percent by the end of 2024.

Moreover, the median federal funds rate is expected to be 4.1 percent in 2025, up from 3.9 percent in the March projection. The median policy rate is anticipated to be 3.1 percent in 2026, unchanged from the March meeting.

Real GDP growth stayed at 2.1 percent in 2024 and 2 percent in 2025 and 2026. The unemployment rate is still seen at 4 percent this year, but the jobless rate forecast was revised higher from 4.1 percent to 4.2 percent in 2025. The unemployment rate for 2026 was also adjusted higher from 4 percent to 4.1 percent.

Projections for the personal consumption expenditures (PCE) price index, which is the central bank’s preferred inflation measurement, were adjusted higher to 2.6 percent at the June meeting from 2.4 percent in March. PCE inflation also was seen slightly higher in 2025, to 2.3 percent from 2.2 percent.

Core PCE, which strips the volatile food and energy sectors, is predicted to be 2.8 percent this year, up from 2.6 percent at the March meeting. Core PCE is expected to be 2.3 percent next year, up from 2.2 percent in the previous SEP data.

Mr. Powell once again shrugged off rate concerns.

“We think policy is restrictive. And we think, ultimately, that if you just set policy at a restrictive level, eventually you will see real weakening in the economy,” he said. “Not to eliminate the possibility of hikes, but no one has that as their base case. No one on the committee does.”

Market Reaction

Financial markets were mixed following the policy announcement.

The Dow Jones Industrial Average erased its gains. The Nasdaq Composite Index kept its gains largely intact, rising by 1.5 percent. The S&P 500, which touched an all-time high, was still up by almost 1 percent.

U.S. Treasury yields were still firmly in the red, with the benchmark 10-year yield down to 4.28 percent.

The U.S. dollar index, a gauge of the greenback against the basket of currencies, was still down at 104.50.

Jeff Klingelhofer, the co-head of investments at Thornburg Investment Management, asserts that investors must distinguish between what the Fed should do and what it might do.

“The Fed should be data dependent,” he said in a note. “When it is abundantly and obviously clear that inflation is contained, the Fed should cut rates to contain a slowdown.”

While the central bank had initially followed this playbook, the institution changed course when Mr. Powell “and others spiced up their rhetoric with proactive rate cuts,” Mr. Klingelhofer said.

“This was a policy mistake, and the Fed has since pivoted from this pivot,” he added.

Others, like Bryce Doty, the senior vice president of Sit Investment Associates, purport that the Fed should consider cutting interest rates because of the way that high borrowing costs have affected the broader economy.

“The Fed has a dentist’s mentality believing that pain now will save you suffering down the road. They are oblivious to how high interest rates are driving up costs for businesses that are being passed onto the consumer,” Mr. Doty said in an email to media outlets.

The higher-for-longer mantra employed by the Fed is “driving the current cost-push inflation” by eroding consumer purchasing power “without a meaningful reduction in inflation,” he noted.

Greg McBride, the chief financial analyst at Bankrate, warns that rates won’t come down rapidly unless there is a drastic reversal in the U.S. economy.

In an email to media outlets, he said, “Absent a complete about-face from the economy, interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers.”

In recent weeks, Fed officials, from Minneapolis Fed President Neel Kashkari to New York Fed chief John Williams, have endorsed the idea of keeping rates at their highest levels in more than two decades until there is more positive inflation data.

Minutes from last month’s policy meeting suggest that “various” individuals support pulling the trigger on one more rate hike to vanquish inflation effectively.

However, while investors haven’t penciled in a rate increase, traders do believe the Fed will hold off on a rate cut until September or November, according to the CME FedWatch Tool.