Federal Reserve maintains key interest rate; single rate cut may happen this year

Fed holds interest rate steady: ©Aaron Kohr - stock.adobe.com

The Federal Reserve kept its key interest rate unchanged, signaling only one rate cut before the end of the year.

The Federal Open Market Committee reduced the number of projected rate cuts from three to one for the year. Additionally, the committee indicated a belief that the long-run interest rate is higher than previously estimated.

New economic forecasts released post-meeting reflected a slight optimism about inflation trends. The Fed remains hopeful that inflation will continue to move toward its 2% goal, allowing for some policy easing later in the year. The FOMC's statement highlighted modest progress toward this objective: "Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2% inflation objective."

This updated language marked a shift from previous statements, which noted a lack of further progress on inflation.

The FOMC's individual rate expectations suggested a more aggressive cutting path in 2025, with four reductions totaling one percentage point, an increase from the previously anticipated three cuts. For the period through 2025, the committee now foresees five total cuts amounting to 1.25 percentage points, down from six projected in March. This would place the federal funds rate benchmark at 4.1% by the end of next year.

The long-run interest rate projection also rose to 2.8% from 2.6%, reflecting a growing acceptance among Fed officials of a "higher-for-longer" interest rate scenario.

Participants increased their 2024 inflation outlook to 2.6%, or 2.8% when excluding food and energy, both up by 0.2 percentage points from March. The Fed's preferred inflation gauge, the Commerce Department’s personal consumption expenditures price index, recorded readings of 2.7% and 2.8% for April. The SEP predicts inflation will return to the 2% target by 2026.

The federal funds rate, currently targeted between 5.25% and 5.50%, is at its highest level in over two decades following 11 rate hikes from March 2022 to July 2023.

Coinciding with the Fed's meeting, the Bureau of Labor Statistics reported that the consumer price index for May showed no monthly increase, and the annual rate slightly decreased to 3.3%. Fed Chair Jerome Powell noted this as a positive sign during a press conference, stating, "We see today’s report as progress and as, you know, building confidence. But we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time."

Despite inflation remaining well above the 2% target, it is significantly lower than the peak of over 9% nearly two years ago. Core inflation readings, excluding food and energy, were at 0.2% month-on-month and 3.4% year-on-year.