The Federal Reserve kept interest rates at a 23-year high on Wednesday, while scaling back its estimate of rate cuts this year to one from three previously.
The central bank voted at the end of its two-day policy meeting to keep its benchmark interest rate within a range of 5.25%-5.50%. The Fed Funds rate has been in this range since July 2023.
The revised median of interest rate cuts forecast for this year came close. Eight officials estimated two cuts this year, while seven officials predicted one cut. Four civil servants saw no cuts this year.
At the same time, Fed officials increased their collective forecast for the number of cuts expected next year. They now see an average of four additional interest rate cuts in 2025. That is more than a previous forecast of three.
Fed officials on Wednesday also raised their 2024 inflation outlook, with prices ending the year at 2.8%, up from 2.6% previously, as measured by their preferred inflation measure: the “core” Personal Price Expenditures (PCE) index.
But in a policy statement, Fed officials made a notable change in language that reflected a new optimism.
Rather than saying that “there is a lack of further progress toward the commission’s 2% inflation target,” the statement asserted that “modest further progress has been made” toward that goal.
Still, officials reiterated in their statement that they first need confirmation of the prospects for inflation returning to the Fed’s 2% target before cutting rates.
“The Committee does not expect that it will be appropriate to lower the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement said.
Fed Chairman Jerome Powell declined at a news conference to give any advice on when an initial rate cut might happen, telling reporters that “I don’t have an exact date for you” and that “we cannot know what the future holds.” “
But he did confirm some optimism from the central bank about the May inflation report released earlier Wednesday that was cooler than expected, and about what that could mean for the coming months.
“We are happy with today’s lecture and hope for more like that,” he said.
The Fed chairman also made clear in his response to a question from Yahoo Finance that he is well aware of the “two-sided” risks of waiting too long to cut rates or cutting them too early, which could undermine all the work that has been done to get inflation going is reversed. down.
“We now have the opportunity to approach this issue carefully and that is what we are doing,” he said, adding that it is not the Fed’s plan to “wait until things break and then try to fix them.” unload.”
The ‘dot plot’
The new projections released Wednesday came in the form of a “dot plot,” a chart updated quarterly that shows each Fed official’s forecast for the direction of the federal funds rate.
In March, the dot plot revealed a consensus among Fed officials of three cuts by 2024. That projection came into question after a series of persistent inflation data during the first quarter and cautious commentary from Fed officials.
The latest reading of that index showed that the annualized change in April compared to March was 2.8%, confirming that inflation was no longer accelerating after a difficult first quarter.
More evidence of moderation on inflation came earlier Wednesday, when a new reading of the consumer price index (CPI) rose 3.3% in May from the previous year – a slowdown from the annual price increase of 3. 4% in April.
The year-over-year change in the “core” CPI – which excludes volatile food and energy prices over which the Fed has no control – was 3.4%, compared with 3.6% in April and 3.8% in March.
Powell has previously made clear that before cutting rates, the Fed will need more than a quarter of data to assess whether inflation is steadily falling toward the central bank’s 2% target.
The chances of a first cut in September rose after the CPI report on Wednesday morning and remained at 58% after Powell’s comments.
Read more: What the Fed’s interest rate decision means for bank accounts, CDs, loans and credit cards
The meeting in September is seen by many as an optimistic argument for a first cutback. To achieve this, two more inflation reports will likely need to be released in the coming months showing improvement before the central bank can pull the trigger.
On Wednesday, Fed officials also maintained their unemployment outlook at 4% and their GDP outlook at 2.1% for the year.
They also raised their outlook for the neutral rate – the rate that neither boosts nor slows growth – to 2.8% from 2.6% previously.
The Fed’s interest rate decision was unanimous.
Click here for an in-depth analysis of the latest stock market news and events affecting stock prices.
Read the latest financial and business news from Yahoo Finance
