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The federal interest rate sees no change

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The federal interest rate sees no change

The Fed is keeping interest rates steady, pointing to one rate cut in 2024

The Federal Reserve kept its key interest rate unchanged on Wednesday and indicated that only one cut is expected before the end of the year.

With markets hoping for a more dovish central bank, Federal Open Market Committee policymakers canceled two rate cuts out of the three announced in March after their two-day meeting. The committee also indicated that it believes that long-term interest rates are higher than previously indicated.

New forecasts released after this week’s two-day meeting indicated mild optimism that inflation remains on track to return to the Fed’s 2% target, allowing some policy easing later this year.

“Inflation has declined over the past year, but remains high,” the statement after the meeting said, echoing language from the previous statement. The only substantive change was the following statement: “Modest further progress has been made in recent months toward the Committee’s 2 percent inflation target.”

The previous language said there was “a lack of further progress” on inflation.

Traders seemed encouraged by the comments, with the S&P 500 jumping to a record on Wednesday after the statement was released.

Aggressive cuts seen for 2025

For the period through 2025, the committee now sees a total of five cuts of 1.25 percentage points, compared to six in March. If forecasts hold, the Fed Funds Rate would remain at 4.1% at the end of next year.

Another important development occurred in the projection of long-term interest rates, a level that neither stimulates nor constrains growth. That rose from 2.6% to 2.8%, a sign that the higher-for-longer narrative is gaining traction among Fed officials.

A further indication of central bankers’ hawkish tendencies is that the scatter plot shows four officials in favor of no cuts this year, up from two previously.

Return to the 2% target

Elsewhere in the FOMC’s Summary of Economic Projections, participants raised their 2024 inflation outlook to 2.6%, or 2.8% when excluding food and energy. Both inflation projections were 0.2 percentage points higher than in March.

The Fed’s favorite inflation gauge is the Commerce Department’s personal consumer expenditures price index, which showed 2.7% and 2.8%, respectively, for April. The Fed is focusing more on core inflation as a better long-term indicator. The SEP indicates that inflation will return to the 2% target, but not until 2026.

The decision and informal forecasts from the meeting’s 19 participants come amid a volatile year for markets and investor hopes that the Fed would start easing after raising interest rates to the highest level in about 23 years.

The federal funds rate, which fixes borrowing costs for banks on a single day but feeds into many consumer debt products, will be in a range of 5.25%-5.50%, due to eleven rate hikes between March 2022 and July 2023.

Earlier in the day, as Fed officials were preparing their economic and interest rate outlook, the Bureau of Labor Statistics released the consumer price index for May. The report showed that inflation remained flat this month, while annual interest rates fell to 3.3% from April’s level. a

At a news conference, Powell said the report was better than almost anyone expected and was factored into the FOMC’s decision.

“We view today’s report as progress and a way to build trust,” Powell said. “But we don’t think we have the confidence at this point that would justify relaxing the policy.”

Inflation remains well above the Fed’s target of 2%, but is also significantly below the peak of just over 9% almost two years ago. The key figures excluding food and energy prices amounted to 0.2% compared to the previous month and 3.4% compared to the period a year ago.

In the first quarter of 2024, economic data turned out to be weaker than those of most of the previous year, with GDP rising only 1.3% year-on-year. April and May were a mixed bag on the data front, but the Atlanta Fed is keeping GDP growth at 3.1%, a solid pace, especially in light of ongoing recession concerns that have hit the economy over the past two years have chased.

However, inflation data has been equally resilient and has caused problems for central bankers.

The year started with markets expecting a strong pace of rate cuts, but this was thwarted by persistent inflation and statements from Fed officials that they were not convinced that inflation is convincingly returning to target.

“This is a non-civil meeting from the Fed. They know conditions are improving but don’t need to rush into rate cuts,” said David Russell, global head of market strategy at TradeStation. “The strong economy means Jerome Powell can squeeze inflation out of the system without hurting jobs. Goldilocks is on the rise, but policymakers don’t want to jinx it.”

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