At 02:00 a.m. Thursday, the Fed kept its benchmark interest rate unchanged at 5.25%-5.50% for the seventh consecutive time, in line with market expectations. In its new policy statement, the Fed acknowledged that "modest further progress" had been made on its 2% inflation target, and the Fed's wording on inflation progress had been upgraded compared to its monetary policy statement in May.
Hawkish Dot Plot
Still, the Fed has delayed the start of its rate cuts until December at the latest. The dot plot shows that Fed officials believe they will cut rates only once this year, two fewer than they expected in March, as inflation is approaching their 2% target more slowly than they expected.
The dot plot shows that most officials are not in a hurry to cut interest rates. Among the 19 officials, 4 officials believe that there will be no interest rate cut this year, compared with 2 officials previously; 7 officials believe that there will be one interest rate cut this year, compared with 2 officials previously; 8 officials believe that there will be two interest rate cuts this year, compared with 5 officials previously; no one believes that there will be three interest rate cuts this year, compared with 9 officials previously; no one believes that there will be four interest rate cuts this year, compared with 1 official previously.
At the same time, the Fed raised its long-term federal funds rate, the so-called neutral rate, to 2.8% from 2.6%, a sign that policymakers have concluded the economy needs more discipline to finish its battle with rising prices.
It now appears that the Fed's rate cuts this year may begin later and more slowly than investors expect, but the Fed's policy rate is expected to fall rapidly next year, with full percentage point cuts in both 2025 and 2026.
The FOMC statement and the latest Summary of Economic Projections show that the Fed is struggling with how to respond to data that many interpret as slowing inflation and how to respond to steady job growth.
On inflation
Fed officials will meet four more times this year in August, September, November and December, and the rate forecasts are likely to temper investor expectations for a September rate cut, which investors had expected following the inflation report earlier on Wednesday.
The Fed made this latest decision a few hours after the Labor Department reported that the CPI was essentially unchanged from the previous month and up 3.3% from a year ago. Meanwhile, the core CPI monthly rate recorded the smallest increase since 2021, up 0.2% from April. It is not clear whether the lack of an increase in the CPI in May from April has affected their interest rate forecasts.
Officials will get just one inflation report before their next policy meeting in August, but will have access to three inflation reports before their mid-September meeting.
Based on the year-over-year change in PCE, Fed policymakers now expect inflation to be 2.6% in the fourth quarter, up from 2.4% in March. Their target is 2%.
The median forecast shows that core PCE will reach 2.8% in the fourth quarter of 2024 and 2.3% in the fourth quarter of 2025. This compares to the median forecasts of 2.6% and 2.2%, respectively, in March.
The economic forecasts suggest that Fed policymakers still expect the economy to experience a so-called soft landing, in which the economy slows, inflation falls and unemployment does not surge.
Fed policymakers do see the unemployment rate, currently 4%, rising to 4.2% by the end of 2025, up from the 4.1% they forecast in March.
They maintained their forecasts for U.S. economic growth at 2.1% this year and 2.0% next year.
Fed officials have been puzzled in recent months about why their stance on interest rates, which influence the cost of mortgages, business debt, auto loans and credit cards, hasn’t slowed economic growth further. But some measures of labor market conditions have returned to levels seen in 2018 and 2019, when growth was solid but inflation was low. Powell will try to explain the mystery.
The article is forwarded from: Jinshi Data
