The Federal Reserve expects to lower interest rates just one time this year, it indicated Wednesday after choosing to keep rates steady, down from the three cuts it forecasted earlier this year but still offering a glimmer of hope for those expecting a Fed pivot soon.
Federal Reserve Chair Jerome Powell still sees work to do on inflation.
The Fed’s policy-setting Open Markets Committee announced Wednesday it would keep the target federal funds rate at the 5.25% to 5.5% range it’s sat since last summer, as widely expected.
The central bank also released its quarterly projection materials, which notably indicated the median Fed staff forecast called for just one rate cut by year’s end, forecasting a range of 5% to 5.25%.
That’s far less stimulatory than the three cuts indicated by the Fed’s December and March forecasts, and much less friendly than the seven cuts priced in by traders in January.
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Another Fed hold this week was widely expected—the market priced in a less than 1% chance of a cut—but it wasn’t always seen that way. As recently as Feb. 1, traders priced a 100% odds of a rate cut in the first half of 2024.
Earlier Wednesday, the government released encouraging inflation data, as core inflation, according to the consumer price index, dipped to its lowest level since April 2021, at 3.4%. “The May’s CPI was very benign” and will “put a spring in” Fed Chairman Jerome Powell’s step, JPMorgan Chase’s chief U.S. economist Michael Feroli predicted ahead of the Fed’s afternoon release.
According to the widely cited CME FedWatch Tool, there’s a roughly 15% probability the Fed will initiate its first cut at its next meeting in July, about a 60% chance rates will be lower by September and 95% odds of a cut by year’s end. The CME Group tracker follows Fed swap contract trades betting on monetary policy. Expert opinions on when a cut will first occur vary, but economists at the likes of Goldman Sachs and Bank of America forecast September. Of course, there’s potential for a change of plans if the U.S. economy undergoes an unforeseen change, demonstrated by the market’s incorrect expectation about a first-half cut.
“Suffice to say, the bond market and the Fed, for that matter, have been perennially wrong on this,” quipped Darrell Cronk, Wells Fargo’s chief investment officer for wealth and investment management, on a Tuesday conference call, referring to the market’s inability thus far to forecast the timing of the Fed policy shift.