Federal Reserve officials penciled in just one interest-rate cut this year and forecast more cuts for 2025, reinforcing policymakers’ calls to keep borrowing costs high for longer to suppress inflation.
Officials voted unanimously to keep the benchmark federal funds rate in a range of 5.25% to 5.5% — a two-decade high first reached in July. But policymakers signaled they now expect to cut rates only once this year, compared to the three reductions forecast in March, according to the median projection.
They now see four cuts in 2025, more than the three previously outlined.
“The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective,” Chair Jerome Powell said Wednesday following the conclusion of a two-day meeting in Washington. “We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.”
Individual officials’ views on the best path forward for borrowing costs differed. The Fed’s “dot plot” showed four policymakers saw no cuts this year, while seven anticipated just one reduction and eight expected two cuts.
The Federal Open Market Committee adjusted language in its post-meeting statement, noting there has been “modest further progress toward the committee’s 2% inflation objective” in recent months. Previously, the statement pointed to a “lack” of further progress.
Fed officials have repeatedly said interest rates are likely to stay elevated for longer after price pressures picked up in the first quarter. But the change nods to more current data showing that price growth ebbed in April and May.
Data released earlier Wednesday offered some reassurance that progress toward the Fed’s 2% inflation target has resumed. The so-called core consumer price index, which excludes food and energy, rose 0.2% in May and 3.4% from a year earlier, the slowest pace since 2021.
Powell said the officials welcomed the latest figures, adding that he hopes for more reports like that. He said Wednesday’s figures had helped build their confidence on the trajectory of inflation but not enough to warrant rate cuts at this time.
“Rate cuts that might have taken place this year take place next year,” he said. “There are fewer rate cuts in the median this year, but there’s one more next year.”
Other countries have already begun to lower borrowing costs. The European Central Bank cut interest rates last week, as did the Bank of Canada.
Yields pared their day’s decline as Powell spoke to reporters. Traders are still betting the Fed will most likely cut rates twice by year end, and see better-than-even odds of a first cut in September.
Fed officials also published fresh forecasts for inflation, raising their projection for underlying inflation to 2.8% from 2.6% in March. They maintained their forecasts for economic growth and the unemployment rate at 2.1% and 4% respectively. The unemployment rate climbed to 4% in May.
Powell described the overall labor market as strong but gradually cooling, comparing it to the state of the jobs market at the cusp of the pandemic. However, he acknowledged that an unexpected weakening could warrant a response by the Fed.
Restrictiveness debate
Officials also raised their projections for where interest rates will settle in the longer term, to 2.8% from 2.6% at the March gathering. The increase, following a slight bump in March, hints policymakers expect higher interest rates are here to stay.
Some officials, including Dallas Fed President Lorie Logan, have said higher borrowing costs may not be slowing the economy as much as previously thought. Still others, such as New York Fed President John Williams, have said that policy is well positioned to bring inflation down to the Fed’s goal.
U.S. central bankers are engaging in a broader discussion about whether the neutral rate, or the rate at which the Fed is neither slowing nor stimulating the economy, has risen since before the pandemic. A higher neutral rate would suggest that monetary policy is not doing as much to restrain the economy.
“The question of whether it’s sufficiently restrictive is going to be one we know over time,” Powell said. “The evidence is pretty clear that policy is restrictive and is having the effects that we would hope for.”
While U.S. economic growth is moderating and spending is cooling, some aspects of the economy are proving more resilient to higher borrowing costs.
U.S. nonfarm payrolls surged by 272,000 in May, surpassing all projections in a Bloomberg survey of economists, and average hourly earnings growth picked up.
The unemployment rate — which is derived from a separate survey — increased to 4% from 3.9%, rising to that level for the first time in over two years.
The Fed also said it would continue to shrink its balance sheet at the slower pace announced in May. Starting this month, the central bank will let its holdings of Treasury securities fall by up to $25 billion a month, down from the previous cap of $60 billion. The cap for mortgage-backed securities was left unchanged at $35 billion.
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