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U.S. Federal Reserve officials have signaled they expect to cut rates just once this year, taking an aggressive stance on inflation as they have kept borrowing costs at a 23-year high.
Updated forecasts on Wednesday showed the Fed’s average rate setter expected a quarter-point cut this year, surprising traders who had priced in two cuts before the report. The central bank maintained interest rates at 5.25 to 5.5 percent.
The new forecasts marked a significant change from the Federal Open Market Committee’s last “dot plot” in March, when officials flagged three cuts this year — and showed continued concerns that inflation remains above the Fed’s 2 percent target .
The prospect of just one cut before the end of the year will be a blow to President Joe Biden, who has put the economy and efforts to reduce inflation at the center of his re-election bid.
The Fed’s hawkish signal came despite the release – just hours before the meeting – of cooler-than-expected consumer price index data for May, which sparked a sharp rally in the stock market and pushed down Treasury yields as traders bet on two rate cuts this year.
Fed Chairman Jay Powell described the CPI figure as “encouraging” and downplayed the committee’s predictions for higher inflation as containing an element of “conservatism.”
Powell added that since 15 of the 19 members supported one or two cuts, both options were “plausible.”
That move was partially reversed after the Fed meeting, with stocks paring gains, Treasury yields rising from session lows and traders withdrawing expectations of a rate cut as early as September.
Expectations for a rate cut in September – the Fed’s last meeting before November’s presidential election – fell to around 64 percent, down from more than 80 percent before the central bank’s announcement on Wednesday.
After a period of choppy trading following Powell’s statement, the S&P 500 ended the day up 0.9 percent, while the tech-heavy Nasdaq Composite rose 1.5 percent. The interest rate on two-year government bonds, which moves with interest rate expectations, fell by 0.07 percentage points to 4.76 percent.
FOMC members acknowledged Wednesday that “modest further progress” had been made toward their 2 percent inflation target — a more confident assertion than their last policy vote in May.
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But four members of the committee said they expected to make no cuts, while seven members said they thought they would make only a quarter-point cut. Eight of the 19 members supported two cuts.
The median projection for the benchmark Fed Funds rate was 5.1 percent, representing a cut of just over a quarter point.
Gargi Chaudhuri, head of iShares Investment Strategy Americas at BlackRock, said the dot plot signal of just one rate cut had not changed her expectations for the Fed’s strategy this year.
“I think they have left the way open to cut rates in September if inflation continues to improve,” Chaudhuri said. “You have a Fed that is not going to continue to overreact to any data point, including softer inflation numbers this morning.”
The latest signal from Fed officials on interest rates also came along with the central bank’s new growth forecasts, which show the U.S. economy will grow 2.1 percent in 2024, unchanged from its previous forecast.
Taxmakers now expect personal consumption expenditure inflation to reach 2.6 percent this year, up from a March estimate of 2.4 percent. They aim for a PCE of 2 percent.
Their 2024 estimate of the core PCE, their preferred measure of underlying inflation, rose to 2.8 percent from 2.6 percent. Expectations for total and core PCE in 2025 rose slightly, from 2.2 percent in March to 2.3 percent.
The FOMC predicts that unemployment will remain at 4 percent by the end of the year.
The Fed’s decision to keep rates on hold was widely expected in the market, but comes after counterparts in the euro zone and Canada cut borrowing costs in recent weeks.