On Wednesday, June 12th, Federal Reserve officials hinted at a possible rate cut in 2024, but most voting members were not in a rush to cut rates, despite a slight improvement in the inflation data announced earlier that day.
During Wednesday’s policy meeting, the Fed decided to keep the federal funds rate in the range of 5.25% to 5.5%, the highest level in the past 20 years.
“Inflation has moderated over the past year but remains elevated,” said the post-meeting statement, maintaining consistency with the previous statement. A change in the latest statement was the acknowledgment that the committee has made moderate progress in achieving the 2% inflation target in recent months.
The new economic projections released after the meeting showed that out of the 19 policymakers, 11 expect no more than one rate cut this year, with 4 officials foreseeing no cuts and 8 anticipating two cuts.
Fed officials will hold four more meetings this year in July, September, November, and December. Market forecasts suggest a potential rate cut in September.
Prior to the Fed’s latest decision, the Labor Department reported on Wednesday morning that the Consumer Price Index (CPI) for May remained relatively flat compared to April, up 3.3% from the same period last year.
The core CPI index, excluding volatile food and energy items, recorded its most modest increase since 2021, rising 0.2% from April, below economists’ expectations.
The report indicated a general easing of price pressures, which could help restore Fed officials’ confidence in inflation returning to the 2% target.
Investors were closely watching the dot plot released after the Fed’s rate decision meeting on Wednesday to assess whether the Fed might cut rates once or twice this year. In March, a majority of Fed officials anticipated three rate cuts, but following a rebound in inflation data, their expectations for the number of cuts decreased.
Before the July policy meeting, the US will release another monthly inflation report, and three more data reports will be published before the mid-September meeting.
Officials, including Fed Chair Powell, are waiting for more compelling evidence before starting a rate cut. However, they also worry about missing the opportune moment to act and potentially facing a significant increase in the unemployment rate.
The Wall Street Journal reported that Fed officials are facing two risks: if they do not cut rates in the coming months as widely expected, poorly prepared and high-interest-sensitive banks and businesses could face severe challenges.
Another risk is that a rate cut may trigger a market rebound and increased spending, maintaining inflation above the Fed’s 2% target. The core CPI index rose by 2.8% in April.
The dot plot reveals that more officials anticipate four rate cuts in 2025, with rates slightly above 4%, higher than the previous dot plot released after the last meeting.
Officials have also raised their inflation forecasts, now expecting core prices to rise by 2.8% in the fourth quarter compared to the same period last year, higher than the March prediction of 2.6%. They forecast core inflation to slow to 2.3% in 2025 and then drop to 2%.
Despite stable employment and income growth, along with significant increases in asset prices like stocks and homes, many Americans still hold pessimistic views about the economy.
Consumers are dissatisfied with the “moderate” annual inflation rate, as the pressures from inflation are cumulative. Since 2021, prices of all goods, from housing to groceries to cars, have risen significantly. Over the past four years, CPI prices have surged by 22%, compared to a 7% increase in the prior four years.
Moreover, the slowdown in inflation has not translated into a reduction in borrowing costs. In recent months, 30-year fixed-rate mortgages have hovered around 7%, close to the highest levels since 2001, while credit card interest rates charged by banks have reached as high as 22%.