Fed Holds Interest Rates Steady, Predicts One Rate Cut
The Federal Reserve announced on Wednesday that it would maintain its current interest rate policy, while also predicting a rate cut at some point this year. The decision came after the conclusion of the two-day Federal Open Market Committee (FOMC) meeting.
The Fed voted to leave its policy rate unchanged within a range of 5.25 percent and 5.5 percent. In a post-meeting statement, the central bank acknowledged that there has been “modest further progress” towards achieving its 2 percent inflation target. While inflation has eased over the past year, it remains elevated.
The statement made it clear that the Fed will not consider cutting rates until there is sufficient evidence to support such a decision. The Committee emphasized that it will carefully assess incoming data, the evolving economic outlook, and the balance of risks before making any adjustments to the target range for the federal funds rate. The Committee expects greater confidence in sustainable inflation movement towards 2 percent before reducing the target range.
Additionally, the rate-setting committee members agreed to continue reducing their holdings of Treasury securities and mortgage-backed securities.
Summary of Economic Projections
The Summary of Economic Projections (SEP) provided further insight into the Fed’s outlook. According to the SEP, the central bank now anticipates only one rate cut this year, leaving the median policy rate at 5.1 percent by the end of 2024.
The projections also showed that the median federal funds rate is expected to increase to 4.1 percent in 2025, up from 3.9 percent in the previous projection. The median policy rate is predicted to remain unchanged at 3.1 percent in 2026.
In terms of economic growth, real GDP is projected to stay at 2.1 percent in 2024 and 2 percent in 2025 and 2026. The unemployment rate is still expected to be at 4 percent this year, but the forecast for 2025 was revised higher from 4.1 percent to 4.2 percent. The unemployment rate for 2026 was also adjusted upward from 4 percent to 4.1 percent.
Projections for the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measurement, were revised higher from 2.4 percent in March to 2.6 percent in June. PCE inflation is expected to be slightly higher in 2025 as well, rising from 2.2 percent to 2.3 percent.
The core PCE, which excludes volatile food and energy sectors, is predicted to be 2.8 percent this year, up from 2.6 percent in the previous projection. It is also expected to be 2.3 percent next year, compared to 2.2 percent in the previous SEP data.
Market Reaction
Following the policy announcement, the financial markets had a mixed response. The Dow Jones Industrial Average erased its gains, while the Nasdaq Composite Index maintained its gains, rising by 1.65 percent. The S&P 500, which reached an all-time high, was still up nearly 1 percent.
U.S. Treasury yields remained in the red, with the benchmark 10-year yield falling to 4.285 percent. The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, continued to decline at 104.50.
Expert Opinions
In recent weeks, several Fed officials have expressed their support for maintaining high interest rates until there is more positive inflation data. This sentiment was echoed in the minutes from last month’s policy meeting, where “various” individuals indicated their support for one more rate hike to effectively combat inflation.
Although investors have not anticipated a rate hike, traders believe that the Fed will delay a rate cut until September or November, as indicated by the CME FedWatch Tool.
In conclusion, the Federal Reserve’s decision to keep interest rates steady reflects their cautious approach towards rate cuts. While there has been some progress towards achieving the 2 percent inflation target, the Fed is waiting for more evidence before making any adjustments. The economic projections provide further insight into the Fed’s expectations for economic growth, unemployment, and inflation. The market reaction was mixed, with different indices responding differently. Overall, the Fed’s decision and projections indicate a cautious and measured approach to monetary policy.
