Federal Reserve Lowers Expectations for 2024 Interest Rate Cuts

Federal Reserve officials have revised their expectations for interest rate cuts this year, with Chairman Jerome Powell suggesting the potential for additional cuts while emphasizing a cautious outlook in their latest forecasts.

Following a two-day policy meeting in Washington, policymakers released updated economic forecasts, now indicating one rate cut in 2024, down from the previously anticipated three. They also raised their inflation forecasts, despite recent consumer price data offering some optimism.

“There is still the possibility of two rate cuts this year, starting in September. Central bankers need more data that will somehow bolster their decision on such an easing move,” said Kathy Bosjancic, chief economist at Nationwide Mutual Insurance Co.

The Federal Open Market Committee (FOMC) maintained its benchmark interest rate in the range of 5.25% to 5.5% for the seventh consecutive meeting, marking the highest level in over two decades.

Investors are currently predicting two rate cuts this year, with futures contracts suggesting a more than 50% chance of the first cut occurring in September.

Ahead of the Fed's decision, the U.S. Bureau of Labor Statistics released data showing that a key measure of core inflation declined for the second consecutive month in May, following higher readings earlier in the year.

Powell described the data as “encouraging” and hinted that the latest consumer price index data might not be fully incorporated into the policymakers’ forecasts. Although the committee was briefed, he noted that "most generally don’t update their forecasts when such data is released mid-session."

“Chairman Powell used the news conference to play down the significance of these forecasts and emphasized that most officials likely did not incorporate today’s softer-than-expected inflation reading into their economic forecasts and dot-plots,” wrote economists at Citigroup Inc. led by Andrew Hollenhorst in a client note.

The Fed is navigating uncertainty about the impact of its tight monetary policy on the economy as it considers the timing for interest rate cuts. Despite high borrowing costs, employment growth and consumer spending have been surprisingly resilient. Inflation has significantly cooled from its pandemic-induced surge but remains above the Fed's 2% target.

Powell stated that officials are carefully examining both upside and downside risks, highlighting a division within the committee. The dot plot revealed that seven officials anticipate one rate cut this year, eight predict two cuts, and four foresee none.

“Powell really relied on the disagreement between executives who supported one reduction and those who supported two. However, in March, although most executives were expecting three or more rate cuts, they were completely ignored,” remarked Derek Tang, an economist at LH Meyer/Monetary Policy Analytics.

Officials also revised their long-term interest rate estimates to 2.8%, up from the 2.6% forecast in March, partly due to the economy’s recent resilience.

According to Bloomberg, some officials, including Dallas Fed President Lori Logan, suggested that higher borrowing costs might not slow the economy as much as previously anticipated. Conversely, New York Fed President John Williams argued that current monetary policy is well-positioned to reduce inflation to the Fed’s target.

“The question of whether it is restrictive enough will be learned over time,” Powell said. “The evidence is pretty clear that the policy is restrictive and is having the results we hope for.”

By fLEXI tEAM