Fed officials signal just one interest rate cut before end of 2024

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US Federal Reserve officials have signalled that they expect to cut interest rates just once this year, taking a hawkish stance on inflation as they held borrowing costs at a 23-year high.

Updated forecasts on Wednesday showed the Fed’s median rate-setter anticipated making one quarter-point cut this year, surprising traders who had priced in two cuts prior to the report. The central bank held rates at 5.25 to 5.5 per cent.

The new predictions marked a significant change from the Federal Open Market Committee’s last “dot plot” in March, when officials signalled three cuts this year — and showed lingering concerns that inflation remains above the Fed’s 2 per cent target.

The prospect of just one cut before the end of the year will be a blow to President Joe Biden, who has put the economy and efforts to beat back inflation at the centre of his re-election pitch.

The hawkish signal from the Fed came despite the release — just hours ahead of the meeting — of cooler-than-expected consumer price index data for May, which triggered a sharp equity market rally and pushed down Treasury yields as traders bet on two rate cuts this year.

Fed chair Jay Powell described the CPI figure as “encouraging” and downplayed the committee’s forecasts for higher inflation as having an element of “conservatism” to them.

Powell added that, with 15 of the 19 members backing either one or two cuts, either option was “plausible”.

That move was partly reversed after the Fed meeting, with stocks trimming their gains, Treasury yields rising off session lows, and traders pulling back expectations of a cut as soon as September.

Expectations of a rate cut in September — the Fed’s last meeting before November’s presidential election — fell to about 64 per cent, from above 80 per cent prior to the central bank’s announcement on Wednesday.

After a bout of choppy trading following Powell’s statement, the S&P 500 ended the day up 0.9 per cent, while the tech-heavy Nasdaq Composite rose 1.5 per cent. The two-year Treasury yield, which moves with interest rate expectations, was down 0.07 percentage points to 4.76 per cent.

FOMC members on Wednesday acknowledged there had “been modest further progress” towards their 2 per cent inflation goal — a more confident assertion than at their last policy vote in May.

But four members of the committee said they expected to make no cuts, while seven said they thought they would make just one quarter-point cut. Eight of the 19 members backed two cuts.

The median projection for the benchmark federal funds rate was 5.1 per cent, implying just over one quarter-point cut.

Gargi Chaudhuri, head of iShares Investment Strategy Americas at BlackRock, said that the dot plot’s signal of just one rate cut had not changed her expectations for the Fed’s strategy this year.

“I think they have left the path open to cut rates in September if they continue to get improvement on inflation,” Chaudhuri said. “You have a Fed that is going to continue to not overreact to any single data point, including softer inflation data this morning.”

Fed officials’ latest signal on interest rates also came alongside the central bank’s new forecasts for growth, which show the US economy expanding by 2.1 per cent in 2024, unchanged from its previous forecast.

Rate-setters now expect personal consumption expenditures inflation of 2.6 per cent this year, from an estimate of 2.4 per cent made in March. They target a headline of PCE of 2 per cent. 

Their 2024 estimate of core PCE, their preferred measure of underlying inflation, rose from 2.6 per cent to 2.8 per cent. Expectations for headline and core PCE in 2025 increased slightly, from 2.2 per cent in March to 2.3 per cent.

The FOMC forecast that unemployment would remain at 4 per cent by the end of the year. 

The Fed’s decision to hold rates was widely expected in the market, but comes after counterparts in the Eurozone and Canada reduced borrowing costs in recent weeks.