Fed holds interest rates for seventh consecutive meeting after ‘modest’ progress on inflation
The US Federal Reserve voted to leave interest rates on hold for the seventh consecutive meeting in a row but surprised markets with projections showing that policymakers expect to cut interest rates only once in 2024.
The rate decision was widely expected and means that the federal funds rate remains in a range of 5.25-5.50 per cent, a level reached last July.
The Fed said that there has only been “modest further progress” towards the two per cent target, cautioning that inflation “remains elevated”.
Alongside its latest decision, the Fed released its latest set of ‘dot-plot’ projections, which signalled that policymakers only expect to cut rates once this year, down from three back in March.
Four of the 19 members of the Federal Open Market Committee said they did not expect to cut rates while seven back a single 25 basis point cut. The remaining eight opted for two cuts.
Changing expectations on the path of interest rates reflected higher inflation forecasts. Rate-setters revised up their median expectation on core personal consumption expenditure (PCE) over the year to 2.8 per cent from 2.6 per cent. Core PCE is the Fed’s preferred gauge of inflation.
“This was a somewhat more hawkish revision than had been expected, and than markets had priced prior to the decision, though should perhaps come as little surprise given the lack of significant progress on inflation thus far this year,” Michael Brown, senior research strategist at Pepperstone said.
However, Paul Ashworth, chief North America economist at Capital Economics, said there was nothing to rule out a September cut. “It all depends on the income data,” he said.
The decision came just a few hours after the latest inflation data for May, which showed inflation slightly undershot expectations.
Prices were unchanged in May for the first time since last June, compared to the 0.1 per cent increase expected by economists, with the headline rate sitting at 3.3 per cent.
Core inflation also came in lower than expected, rising just 0.2 per cent on last month. This was the slowest rate of increase since August 2021.
Looking back over this year, however, inflation has remained frustratingly persistent. Inflation fell as low as three per cent in June last year, but has not gone any lower since.
This has forced markets to reassess when the rate cutting cycle will begin. At the turn of the year investors thought the cutting cycle would be well underway but now traders do not expect a cut until September.
Although there are some signs the economy is beginning to weaken under the pressure of the Fed’s rate hikes, it remains too strong to be confident that inflation will remain sustainably at two per cent.
Figures out last week showed that the economy added significantly more jobs than expected in April. The Fed noted that “job gains have remained strong and the unemployment rate has remained low”.
The decision comes a week after the European Central Bank (ECB) voted to cut interest rates for the first time in five years, reflecting the underlying weakness of the European economy. The Bank of England meets next week and is expected to leave rates on hold.