Fed Holds Rates Steady, Signals One Cut This Year

The Federal Reserve announced Wednesday that it will keep interest rates steady, indicating it expects to lower rates just once this year. This marks a significant reduction from the three cuts previously forecasted but still offers some optimism for those anticipating a shift in Fed policy soon. The Fed’s Open Market Committee decided to maintain the target federal funds rate in the 5.25% to 5.5% range, where it has been since last summer, aligning with widespread expectations. Additionally, the central bank released its quarterly projections, which now include a median forecast of one rate cut by year-end, targeting a range of 5% to 5.25%. This is considerably less aggressive than the three cuts projected in December and March and far more conservative than the seven cuts predicted by traders in January.

Fed Chairman Jerome Powell emphasized the need for continued positive economic data to justify any rate cuts, noting that the forecasts are not definitive plans but rather projections based on various factors, including inflation, labor market conditions, and economic output. While the Fed’s decision to hold rates was anticipated, with the market pricing in less than a 1% chance of a cut, this was not always the case. As recently as February 1, traders had fully expected a rate cut in the first half of 2024.

Earlier on Wednesday, government data showed encouraging signs of cooling inflation, with core inflation, as measured by the consumer price index, dropping to 3.4%, its lowest level since April 2021. JPMorgan Chase’s chief U.S. economist Michael Feroli commented that the benign May CPI data could boost Powell’s confidence. According to the CME FedWatch Tool, just before the Fed’s announcement, there was about a 15% probability of a rate cut at the next meeting in July, a 60% chance by September, and 95% odds of a cut by year-end. The tool tracks trades in Fed swap contracts that speculate on monetary policy. Predictions on the timing of the first cut vary, with economists from Goldman Sachs and Bank of America forecasting September. However, unexpected economic changes could alter these plans, as evidenced by the market’s incorrect expectation of a first-half cut.

“Suffice to say, the bond market and the Fed, for that matter, have been perennially wrong on this,” said Darrell Cronk, Wells Fargo’s chief investment officer for wealth and investment management, during a Tuesday conference call, highlighting the challenges in accurately predicting Fed policy shifts.