The Fed is keeping interest rates steady and expects only one cut this year

Fed officials left interest rates unchanged in their portfolios June decision They expected that they would do so Reducing borrowing costs Just once before the end of 2024, a sign that they plan to be patient before they turn the corner in their battle against rapid inflation.

Central bankers quickly raised interest rates between early 2022 and July 2023, pushing them to their highest level in more than two decades at 5.3%. It has held those rates steady ever since, hoping that rising borrowing costs would slow consumer and business demand enough to quash rapid price increases.

Inflation slowed steadily in 2023, falling enough that Fed officials entered 2024 expecting to cut interest rates three times this year. But then rate increases proved surprisingly stubborn at the start of the year – and policymakers were forced to postpone their plans to cut interest rates, for fear of cutting borrowing costs too early.

Now this image is in the process of changing again. New CPI inflation data released on Wednesday confirmed that flattening inflation in early 2024 was a speed bump rather than a change in trend: Price increases slowed significantly in May. But it is too late this year for the Fed to pull back the triple rate cuts it expected in March, the last time policymakers issued economic forecasts. In their new forecast on Wednesday, officials expected that they would cut interest rates only once, to 5.1 percent, before the end of 2024.

Fed officials did not give any clear hint about when interest rate cuts would begin. They meet Four more times This year: in July, September, November and December.

Fed Chairman Jerome Powell said during a news conference following the statement that officials are still looking for “greater confidence” that inflation is moving sustainably to 2 percent before cutting interest rates.

“The economic outlook is uncertain,” Mr. Powell said. “We remain very attentive to inflation risks.”

Mr. Powell explained that moving policy “too early or too much” could reverse progress on inflation, but moving too late or too little could “unjustifiably” weaken economic activity. He explained that the Federal Reserve’s new expectations are not a fixed plan or decision, but rather things can change.

The Fed’s expectation of a rate cut may come as a surprise to investors and economists, many of whom expected the Fed to still aim for two cuts before the end of the year. But the big adjustment came as Fed policymakers took a broader turn toward more dovishness. Officials expect inflation to be firmer than they previously expected in 2024, Fed forecasts showed: They forecast that overall inflation could end the year at 2.6 percent, up from 2.4 percent in their previous estimate. Central bankers also expect that the unemployment rate may be slightly higher next year than previously expected.

Policymakers revised their statement to reflect that price increases are beginning to ease again after pausing early in the year.

“In recent months, there has been further modest progress toward the committee’s 2 percent inflation target,” the Fed statement said.

Mr. Powell noted that the Fed’s inflation forecasts were “conservative.”

“We welcome today’s reading, and hope for more like it,” Powell said.

Although the general picture painted by the Federal Reserve’s economic forecasts was cautious, it had positive aspects.

Policymakers expect growth to hold up even as interest rates remain high this year. Fed officials expect to cut interest rates more quickly next year, suggesting that some of the rate cuts they initially planned for 2024 have simply been postponed. They now expect four rate cuts in 2025, up from three previously. Rates were expected to end 2026 at 3.1 percent, unchanged from the March estimate.

But the Fed raised its forecasts for where interest rates will settle over the long term. The long-term interest rate is a rough estimate of the setting that will keep the economy functioning in equilibrium over time, so if interest rates are higher than that you expect them to slow the economy, and if they are lower than that you expect them to accelerate it. Officials now see the longer-term “neutral” rate at 2.8 percent, up from 2.6 percent previously, suggesting that today’s policy setting is pressing the brakes on growth a little less forcefully than previously understood.