The Fed Holds Rates Steady and Predicts Just One Reduction This Year

Federal Reserve officials left interest rates unchanged in their June decision and predicted that they will cut borrowing costs just once before the end of 2024, a sign that they plan to be patient before turning a corner in their fight against rapid inflation.

Central bankers lifted interest rates rapidly between early 2022 and July 2023, pushing them up to a more than two-decade high of 5.3 percent. They have held them steady since, hoping that higher borrowing costs will slow consumer and business demand enough to crush rapid price increases.

Inflation slowed steadily in 2023, coming down enough that Fed officials entered 2024 expecting to cut interest rates three times this year. But then price increases proved surprisingly stubborn at the start of the year — and policymakers had to push back their plans for rate cuts, afraid of lowering borrowing costs too early.

Now that picture is in the process of changing again. Fresh Consumer Price Index inflation data released Wednesday reaffirmed that the early 2024 inflation stickiness was a speed bump rather than a change in the trend: Price increases cooled notably in May. But it is getting too late in the year for the Fed to pull off the trio of rate cuts that they had expected as recently as March, the last time that policymakers released economic forecasts. Officials predicted in their fresh forecasts on Wednesday that they will lower rates just once, to 5.1 percent, before the end of 2024.

Fed officials gave no clear hint as to when rate cuts will start. They meet four more times this year: in July, September, November and December.

Jerome H. Powell, the Fed chair, said during a news conference following the release that officials are still looking for “greater confidence” that inflation is moving sustainably to 2 percent before cutting rates.

“The economic outlook is uncertain,” Mr. Powell said. “We remain highly attentive to inflation risks.”

Mr. Powell explained that moving policy “too soon or too much” could result in a reversal in progress on inflation, but that moving too late or too little could “unduly” weaken economic activity. He made it clear that the Fed’s fresh forecasts are not a firm plan or a decision — things could change.

The Fed’s single rate cut prediction might come as something of a surprise to investors and economists, many of whom had expected the Fed to still aim for two reductions before the end of the year. But the big revision came as Fed policymakers took a broader turn toward greater caution. The Fed’s forecasts showed that officials expect inflation to prove stickier than they had previously anticipated in 2024: Overall inflation could end the year at 2.6 percent, they predicted, up from 2.4 percent in their earlier estimate. Central bankers also forecast that the unemployment rate might tick up slightly more next year than they had previously anticipated.

Policymakers did adjust their statement to reflect that price increases have begun to cool again after stalling early in the year.

“In recent months, there has been modest further progress toward the committee’s 2 percent inflation objective,” the Fed’s statement said.

Mr. Powell suggested that the Fed’s inflation forecasts were “conservative” ones.

“We welcome today’s reading, and hope for more like that,” Mr. Powell said.

While the overall picture painted by the Fed’s economic forecasts was a wary one, it did have its silver linings.

Policymakers predicted that growth would hold up even as rates remained higher this year. And Fed officials expected to lower interest rates more rapidly next year, suggesting that some of the rate cuts that they had initially planned to make in 2024 were simply getting pushed back. They now expected to make four rate cuts in 2025, up from three previously. Rates were expected to end 2026 at 3.1 percent, unchanged from the March estimate.

But the Fed did increase its forecast for where interest rates will settle in the longer run. The long-run interest rate is a rough estimate of the setting that will keep the economy operating at an even keel over time, so if rates are above it you would expect them to slow the economy, and if they are below it you would expect them to speed it up. Officials now see that longer run “neutral” setting at 2.8 percent, up from 2.6 percent previously, which suggests that today’s policy setting is tapping the brakes on growth a little bit less aggressively than was previously understood.

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