The Federal Reserve kept interest rates at a 23-year high on Wednesday and adjusted its forecast for rate cuts this year, reducing the expected number from three to one. Concluding its two-day policy meeting, the central bank maintained its benchmark interest rate in the 5.25%-5.50% range, where it has been since July 2023.
The decision on this year’s rate cuts was closely split. Eight officials projected two cuts, seven anticipated one, and four expected no cuts at all. However, the Fed increased its outlook for next year, now predicting a median of four additional rate cuts in 2025, up from a previous estimate of three.
On Wednesday, Fed officials revised their 2024 inflation outlook upwards, projecting prices to end the year at 2.8%, up from the previous estimate of 2.6%, based on their preferred measure, the “core” Personal Consumption Expenditures (PCE) index.
In a notable shift in their policy statement, Fed officials expressed newfound optimism. The statement, which previously indicated “a lack of further progress towards the committee’s 2% inflation objective,” now claims that “there has been modest further progress” towards that goal.
However, the Fed emphasized that rate cuts would not be considered until there’s clear evidence that inflation is moving sustainably towards the 2% target. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement read.
The updated projections, presented in the quarterly “dot plot,” reveal each official’s forecast for the federal funds rate. In March, officials generally anticipated three rate cuts in 2024, a view that has been questioned due to persistent inflation and cautious comments from the Fed.
Recent data showed the core PCE index holding at a year-over-year increase of 2.8% in April, confirming that inflation had stabilized after a challenging first quarter. Additional evidence of easing inflation was seen on Wednesday when the Consumer Price Index (CPI) reported a 3.3% rise over the previous year in May, down from April’s 3.4%. The core CPI, excluding volatile food and energy prices, rose 3.4% year-over-year, compared to 3.6% in April and 3.8% in March. “We welcome today’s reading and hope for more like that,” Fed Chair Jerome Powell said at a press conference.
Powell emphasized that the Fed would need more consistent data before considering rate cuts, likely looking for improvement in the next two inflation reports to justify action at the September meeting. Officials maintained their 4% unemployment forecast and a 2.1% GDP growth outlook for the year. They also increased the neutral rate estimate to 2.8% from 2.6%. The rate decision was unanimous.
