Fed Keeps Rates Unchanged, Lowers Outlook for Rate Cuts amid Elevated Inflation
As expected, the Fed opted to keep rates unchanged in a range of 5.25% to 5.50% for now the seventh consecutive meeting since September 2023.
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In the statement, the Fed’s general assessment of economic conditions was little changed, continuing to describe activity as “solid,” amid "strong" job gains. Inflation, however, was said to have made “modest” further progress towards the Fed’s 2% target, no doubt acknowledging the relative improvement over the past two months after three months of acceleration at the start of the year. As Powell noted during the Press conference, “Today was a better inflation report than almost anyone expected.” “Inflation has eased substantially from peak levels,” he continued, “but is still too high.”?
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On the balance sheet, with details of the redemption caps announced last meeting, the statement noted more succinctly that the Committee will continue to reduce its holdings of both Treasuries and MBS securities.
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The biggest adjustment in today’s announcement came from the longer-run projections for rates in the long-awaited update of the Summary of Economic Projections. According to the dot plot, on average, Committee members see just one rate cut by year-end with the federal funds rate declining to 5.1%, up from the median forecast of 4.6% indicated in the March release amid the prospect of three rate cuts. Furthermore, as expected, there appears to be a growing divide between those members hopeful of inflation resuming its previous disinflationary path and those underscoring rising risks – upside risks – to price pressures. Four Fed officials, in fact, see no rate cuts in 2024, while eight see as many as two rate reductions.?
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The median estimate for rates at the end of 2025, meanwhile, rose from 3.9% to 4.1% suggesting, on average, Committee members now expect four rate cuts versus an earlier estimate of three cuts next year.?
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Despite the recent improvement in inflation, price pressures continue to prove stickier in nature, well beyond earlier expectations. The Fed has acknowledged as much, lifting its outlook for headline inflation this year from 2.4% to 2.6%, and from 2.2% to 2.3% in 2025.?The core PCE forecast was also revised higher from 2.6% to 2.8% this year and from 2.2% to 2.3% next year. In 2026, however, Committee members left their projections unchanged at 2.0% for both the headline and the core. As Powell noted during the press conference, the economic outlook remains highly uncertain, and the Committee remains highly attentive to inflation risks.
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Aside from rates, the Fed also updated its growth and labor market outlook.?The Fed’s GDP projections were mostly unchanged; the Committee continues to anticipate a 2.1% growth rate for 2024, and 2.0% for 2025, 2026 as well as in the longer run.?The unemployment rate, meanwhile, was unrevised at 4.0% this year, while officials revised up their forecast for next year and 2026 from 4.1% to 4.2% and from 4.0% to 4.1%, respectively.?"We see gradual cooling," Chair Powell said, with the labor market moving towards a better balance.?
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Bottom Line: A cooler-than-expected inflation report this morning following minimal improvement in April has reinforced the Fed’s position on the sidelines.?Although on a relative basis, with the annual pace of inflation still above January levels, (3.3% vs. 3.1%) and nominally, the growth rate of inflation still accelerating well beyond 2%, it’s clear the Committee has more work to do before the goal of price stability is achieved, let alone gains the needed confidence to justify a reduction in policy firming.?The Fed has conceded it will take longer than expected to gain said confidence, however, despite such a realization, policy makers continue to maintain a policy bias towards easing – eventually.?However, of course, as previously noted, with inflation and the broader economy failing to evolve as expected, despite the Fed’s optimism,?“eventually” increasingly appears to be a 2025 event.????
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Link to June 12 FOMC statement and Summary of Economic Projections:
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-Lindsey Piegza, Ph.D., Chief Economist