In a move that could dampen hopes for a swift reversal of its aggressive rate-hiking campaign, the Federal Reserve held interest rates steady on Wednesday and scaled back projections for rate cuts this year. Despite acknowledging "modest further progress" in taming stubbornly high inflation, policymakers signaled a resolute stance, forecasting just a single quarter-point rate reduction by the end of 2024.
The highly anticipated decision, accompanied by fresh economic projections, painted a picture of a central bank determined to stay the course in its fight against inflation. The new quarterly "dot plot" of individual policymaker projections revealed a stark shift from the Fed's March meeting when officials had penciled in three rate cuts for 2024. This time around, the consensus splintered, with eight officials estimating two cuts, seven predicting a solitary reduction, and four envisioning no cuts at all.
"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," the Fed's policy statement asserted, underscoring the high bar for loosening the economic reins.
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Fed Chair Jerome Powell, addressing reporters during the post-meeting press conference, declined to offer any guidance on the timing of a potential first rate cut, citing the inherent uncertainty surrounding the inflation outlook. However, he did acknowledge the central bank's optimism stemming from the latest inflation reading – the consumer price index cooled to a 3.3% annual increase in May, down from 3.4% in April.
"We welcome today's reading and hope for more like that," Powell stated, while cautioning that the Fed must navigate the "two-sided" risks of cutting rates too soon, potentially undoing progress made in the inflation battle, or waiting too long and risking an undue economic slowdown.
Despite the cautious tone, markets remained hopeful for a pivot in monetary policy, with fed funds futures indicating a 58% chance that the central bank will trim rates at least once by its September meeting, according to the CME FedWatch Tool.
The Fed's updated projections also revealed a more optimistic outlook for 2025, with officials now forecasting four rate cuts next year, up from the three reductions previously anticipated. This shift suggests policymakers expect inflation to moderate further, allowing for a more accommodative stance in the latter half of 2024 and into 2025.
Underscoring the persistent inflation challenges, the central bank raised its year-end forecast for 2024 inflation to 2.8%, up from the 2.6% projection in March, based on its preferred measure of core Personal Consumption Expenditures (PCE) prices.
Wednesday's decision comes on the heels of mixed economic data, with the latest employment report showing robust job gains but signs of cooling wage pressure. As policymakers grapple with the delicate balance of nurturing economic growth while keeping a firm grip on price pressures, the path ahead is likely to be paved with continued uncertainty and volatility.
While the Fed's scaled-back rate cut projections may disappoint some investors, the central bank's unwavering commitment to restoring price stability could ultimately pave the way for a more sustainable economic recovery in the long run.