Fed officials are signaling just one rate cut until the end of 2024

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Federal Reserve officials have signaled they expect to cut interest rates just once this year and have taken a hawkish stance on inflation as they have kept borrowing costs at a 23-year high.

Updated forecasts on Wednesday showed the Fed’s average rate maker had forecast a cut of a quarter of a percentage point this year, surprising traders who had cut prices twice ahead of the report. The central bank kept rates at 5.25 to 5.5 percent.

The new forecasts marked a significant change from the Federal Open Market Committee’s last “dot chart” in March, when officials signaled three cuts this year — and showed lingering concerns that inflation remains above the Fed’s 2 percent target.

The prospect of just one cut before the end of the year will be a blow to President Joe Biden, who has put the economy and efforts to curb inflation at the center of his re-election campaign.

The hawkish signal from the Fed came despite the release – just hours before the meeting – of cooler-than-expected consumer price index data for May, sparking a sharp rally in the stock market and squeezing Treasury yields as traders bet on two rate cuts. this year.

Fed Chairman Jay Powell described the CPI reading as “encouraging” and played down the committee’s forecasts for higher inflation as having an element of “conservatism”.

Powell added that with 15 of the 19 members supporting one or two cuts, either option was “likely”.

That move was partially reversed after the Fed meeting, with stocks paring their gains, Treasury yields rising from session lows and traders pulling back expectations of a cut as early as September.

Expectations for a rate cut in September — the Fed’s last meeting before November’s presidential election — fell to about 64 percent, from more than 80 percent before the central bank’s announcement on Wednesday.

After a bout of choppy trading following Powell’s statement, the S&P 500 ended the day up 0.9 percent, while the tech-heavy Nasdaq Composite rose 1.5 percent. The two-year Treasury yield, which moves with interest rate expectations, fell 0.07 percentage point to 4.76 percent.

FOMC members acknowledged on Wednesday that there had been “modest further progress” toward their 2% inflation target — a more confident statement than at their last policy vote in May.

But four committee members said they didn’t expect any cuts, while seven said they thought they would make just one quarter-point cut. Eight of the 19 members supported two cuts.

The median projection for the benchmark federal funds rate was 5.1 percent, a decrease of just over one quarter point.

Gargi Chaudhuri, head of iShares Investment Strategy Americas at BlackRock, said the dot chart’s signal of just one rate cut did not change her expectations for the Fed’s strategy this year.

“I think they have left a path to cut rates in September if they continue to improve inflation,” Chaudhuri said. “You have the Fed continuing to not overreact to any single data point, including this morning’s softer inflation data.”

The latest signal from Fed officials on interest rates also came alongside the central bank’s new growth forecasts, which show the US economy growing by 2.1 percent in 2024, unchanged from the previous forecast.

Ratemakers now expect personal consumption expenditure inflation to be 2.6 percent this year, up from March’s estimate of 2.4 percent. They are targeting a headline PCE of 2 percent.

Their estimate of core PCE for 2024, their preferred measure of core inflation, rose to 2.8 percent from 2.6 percent. Expectations for headline and core PCE rose slightly in 2025, from 2.2 percent in March to 2.3 percent.

The FOMC predicts that unemployment will remain at 4% until the end of the year.

The Fed’s decision to keep rates on hold was widely expected in the market, but comes after peers in the eurozone and Canada cut borrowing costs in recent weeks.