Federal Reserve foresees only one rate cut this year and Powell explains that “we will need to see more good data”

Federal Reserve officials They projected only one interest rate cut this year and forecast further cuts by 2025, reinforcing their calls to keep borrowing costs high for longer to contain inflation.

The councilors voted unanimously to leave the reference rate of the federal funds unchanged in a range between 5.25% and 5.5%a two-decade high first reached in July.

But authorities noted that They now expect to cut rates just once this year, compared with three reductions forecast in March., according to the median projection. Thus, they now anticipate four cuts in 2025, more than the three previously predicted.

During his press conference, Fed Chairman Jerome Powell stated that the economic outlook is uncertain and that “we remain very vigilant” about inflationary risks.

About the decision he mentioned that the lThe most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward the 2% target. “We will need to see more good data to reinforce our confidence that inflation is moving sustainably towards 2%”

Thus, he indicated that the central bank still does not have the necessary confidence to begin the relaxation cycle, but he was optimistic regarding the data published this Wednesday on the Consumer Price Index (CPI), which showed no variation in May and fell slightly to 3.3% in one year; Meanwhile, the core CPI moderated by 3.4%.

Data that Powell called “progress and, you know, confidence-building.” However, he stated that ““We do not see ourselves with the confidence that would justify beginning to make the policy more flexible at this time.”

He added that “l“Rate cuts that could have happened this year will happen next year.” Thus, he indicated that “there are fewer rate cuts in the median this year, but there is one more next year.”

Dot plot

Individual officials’ opinions on the best path forward for borrowing costs differed. He “dot plot” (dot plot) The Federal Reserve’s report showed that four policymakers saw no cuts this year, while seven anticipated only one reduction and eight expected two cuts.

The Federal Open Market Committee (FOMC) adjusted the language in his post-meeting statement released Wednesday, noting that there has been “modest further progress towards the committee’s 2% inflation target” in recent months.

Previously, the statement noted a “lack” of new advances. The change refers to more current data showing that price growth slowed in April and May.

Fed officials have repeatedly said that interest rates will likely stay elevated longer after price pressures increased in the first quarter.

Data released early Wednesday offered some reassurance that progress toward its 2% inflation target has resumed. The so-called core consumer price index, which excludes food and energy, rose 0.2% in May and 3.4% from a year earlier, the slowest pace since 2021.

Economic projections

Before the announcement, investors were betting that the Federal Reserve would cut rates twice this year and saw a high probability of a first cut starting in Septemberaccording to futures contracts.

Other countries have already begun to reduce borrowing costs. The European Central Bank cut interest rates last week, as did the Bank of Canada.

Federal Reserve officials also released new inflation forecasts, raising its core inflation projection to 2.8% from 2.6% in March. Meanwhile, they maintained their economic growth and unemployment forecasts at 2.1% and 4% respectively. The unemployment rate rose to 4% in May.

Highest neutral rate

Officials also raised their forecasts for where interest rates will stabilize over the long term, to 2.8% from 2.6% at the March meeting.

The increase, after a slight increase in March, suggests that Officials believe higher interest rates are here to stay.

Some officials, including Dallas Federal Reserve President Lorie Logan, have said higher borrowing costs may not be slowing the economy as much as thought previously.

Others, such as New York Fed President John Williams, have said the policy is well positioned to bring inflation down to the Fed’s target.

U.S. central bankers are engaged in a broader debate over whether The neutral rate, or the rate at which the Federal Reserve does not slow down or stimulate the economy, has increased since before the pandemic.

A higher neutral rate would suggest that monetary policy is not doing as much to slow the economy.

resilient economy

While U.S. economic growth is moderating and spending is cooling, some aspects of the economy are proving more resilient to higher borrowing costs.

US nonfarm payrolls increased by 272 thousand in Maysurpassing all projections in a Bloomberg survey of economists, and growth in average hourly earnings accelerated.

The unemployment rate, which is derived from a separate survey, rose from 3.9% to 4%, reaching that level for the first time in more than two years.

Fed Balance Sheet

The Federal Reserve also said it would continue to reduce its balance sheet at the slower pace announced in May.

Starting this month, the central bank will allow its holdings of Treasury securities to fall to as much as $25 billion a month, down from the previous limit of $60 billion. The limit for mortgage-backed securities remained unchanged at $35 billion.