Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Fed keeps rates steady, but sees just one cut for this year in hawkish surprise

Published 12/06/2024, 19:38
Updated 12/06/2024, 22:04
© Reuters
US500
-

Investing.com -- The Federal Reserve kept interest rates unchanged on Wednesday, but in a hawkish surprise the central bank now sees just one rate cut for the year, as inflation is expected to trend higher than previously expected.

The Federal Open Market Committee, the FOMC, kept its benchmark ratein a range of 5.25% to 5.5%.

While the unchanged decision, the eighth in a row, was largely expected, Fed members now believe that fewer rate cuts are needed this year.

Fed members now see the benchmark rate falling to 5.1% this year, suggesting just one rate cut in 2024, compared with a prior estimate in March for three cuts. In 2025, Fed members see the rates falling to 4.1%, up from a prior forecast for 3.9%, before eventually declining to 3.1% in 2026.

There outlook of one rate cut wasn't one shared by everyone on the committee, with four committee members backing no cuts this year.

"The shifts in the projections of the Fed's SEP are more hawkish than we anticipated," Economists at Jefferies said in a Wednesday note following the decision. 

In a sign that members are worried about whether policy will be restrictive in the long run, the Fed lifted its forecast on the neutral rate, one that neither stimulates nor restricts economic growth, to 2.8% from 2.6% previously. 

The path to fewer expected rate cuts for the year come as the central bank lifted its forecasts on inflation following a string of upside surprise in Q1. 

The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is forecast to be 2.8% in 2024, up from a prior forecast of 2.6%. For 2025, inflation is estimated to be 2.3%, up from 2.2% previously. 

The stickier outlook on inflation wasn't accompanied by expectations for stronger economic growth as central bank members left gross domestic product, or GDP, forecasts unchanged at 2.1% for this year and 2% for the next. 

On the labor market, meanwhile, unemployment rate seen at 4% this year, unchanged from a prior forecast in March, but is now expected to pick up pace to 4.2% next year, up 0.1% from a prior projection of 4.1%.

Stocks were largely unchanged on the news, with S&P 500 hovering near record levels as data earlier on Wednesday, showing consumer inflation slowed more than expected in May, buoyed optimism that the disinflation trend remains on track.   

In his press conference, Fed Chairman Powell acknowledged the cooler than expected inflation data, but said the committee would continue to monitor the incoming data to establish a trend.

The Fed chief was pressed on how many months of data showing inflation was slowing would be needed to trigger a rate cut. But "unsurprisingly Powell dodged a question about a potential September rate cut and would not commit to any future moves in interest rates," Jefferies added.

Others, however, flagged Powell remarks that the Summary of Economic projections, or so-called dot plots, on inflation were "conservative" as a sign that the door for more than one cut remained open. 

"We interpreted this as suggesting that the Fed chair ... is keeping the door very much open to a September cut provided that the May downshift is broadly sustained in the next few months," Evercore ISI said in Wednesday note.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.