Fed policy makers’ forecast for one rate cut was down from their previous projection of three cuts.Jonathan Ernst/Reuters
U.S. Federal Reserve officials said Wednesday that inflation has fallen further toward their target level in recent months but signalled that they expect to cut their benchmark interest rate just once this year.
The policy makers’ forecast for one rate cut was down from their previous projection of three cuts, because inflation, despite having cooled in the past two months, remains persistently above their target level.
The scaled-back estimate for rate cuts came as something of a surprise, given that the government reported earlier Wednesday that consumer inflation eased in May more than most economists had expected. That report suggested that the Fed’s high-rate polices are succeeding in taming inflation.
Financial markets took encouragement, though, from the policy statement the Fed issued after its latest meeting ended, which underscored that it sees progress in its fight against high inflation. Broad stock indexes rose sharply, and bond yields fell in response.
Whenever the Fed does begin to reduce its benchmark rate, now at a 23-year high, it would eventually lighten loan costs for consumers, who have faced punishingly high rates for mortgages, auto loans, credit cards and other forms of borrowing.
The central bank’s rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low 4 per cent, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under U.S. President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.
Speaking at a news conference after the Fed meeting ended, Chair Jerome Powell seemed to play down the significance of the policy makers’ collective forecast of just one rate cut in 2024. That forecast is derived from the individual predictions of 19 policy makers, and Mr. Powell noted that 15 of the officials projected either one or two rate cuts this year.
“I would look at all of them as plausible,” he said.
“No one,” the Fed chair added, “brings to this a really strong commitment to a particular rate path. It’s just what they think in a given moment in time.”
Some economists say two rate cuts, with the first one coming as early as September, are still possible despite the central bank’s prediction of just one.
“I don’t think September’s off the table,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said. “To get there, you’d have to have a string of inflation reports like the one we got this morning.”
In its policy statement, the Fed noted that the economy is growing steadily, while hiring has “remained strong.” Fed officials also noted that in recent months there has been “modest” further progress toward their 2-per-cent inflation target. That is a more positive assessment than after the Fed’s previous meeting May 1, when the officials had noted a lack of progress.
Still, the central bank made clear that further improvement is needed.
“We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2 per cent,” Mr. Powell said at a news conference after the Fed meeting ended.
The policy makers, as expected, kept their key rate unchanged at roughly 5.3 per cent. The benchmark rate has remained at that level since July of last year, after the Fed raised it 11 times to try to slow borrowing and spending and cool inflation.
The Fed’s latest projections are by no means fixed in time. The policy makers frequently revise their plans for rate cuts – or hikes – depending on how economic growth and inflation evolve over time.
On Wednesday morning, the government reported that inflation eased in May for a second straight month, a hopeful sign that an acceleration of prices that occurred early this year may have passed. Consumer prices excluding volatile food and energy costs – the closely watched “core” index – rose just 0.2 per cent from April, the smallest rise since October. Measured from a year earlier, core prices climbed 3.4 per cent, the mildest pace in three years.
“We welcome today’s [inflation] reading and hope for more like that,” Mr. Powell said.
Inflation has tumbled from a peak of 9.1 per cent two years ago. The policy makers now face the delicate task of keeping rates high enough to slow spending and fully defeat high inflation without derailing the economy.
Measures of inflation had cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing,” whereby it would manage to conquer inflation through rate hikes without causing a recession. But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperilling a soft landing.
Asked at his news conference about the eventual need for rate cuts, Mr. Powell said, “We think ultimately if you set [interest-rate] policy at the restrictive level, eventually you will see real weakening in the economy.”
Though the economy has managed to keep growing despite the high rates the central bank has engineered, the Fed chair said that “ultimately, we think rates will have to come down to continue to support that. So far, they haven’t had to.”
As part of the updated quarterly forecasts the policy makers issued Wednesday, they projected that the economy will grow 2.1 per cent this year and 2 per cent in 2025, the same as they had envisioned in March. They expect core inflation to be 2.8 per cent by year’s end, according to their preferred gauge, up from a previous forecast of 2.6 per cent. And they project that unemployment will stay at its current 4-per-cent rate by the end of this year and edge up to 4.2 per cent by the end of 2025.
The expectation that the unemployment rate will remain around those low levels indicates that the officials believe that while the job market will gradually slow, it will remain fundamentally healthy.
“By so many measures,” Mr. Powell said, “the labour market was kind of overheated two years ago, and we’ve seen it move back into much better balance between supply and demand.”