Fed Keeps Rates Steady and Forecasts Only One Cut This Year (2024)

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.

Given the deluge of data today, investors are likely to feel somewhat relieved. The S&P 500 ended 0.8 percent higher, and although government bond yields, which underpin borrowing rates across the economy, retraced some of their earlier drop, the overall direction of travel remained positive.

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Here are some takeaways from the Fed’s decision and Chair Powell’s comments:

• The Fed is in no rush to cut rates, because the job market is holding up. They want more confidence that inflation is coming down.

• In light of that, officials predicted just one cut in 2024, down from a forecast for three previously. Powell suggested that the forecast is not a firm plan, though.

• What will determine what happens next? Powell suggested it hinges on inflation slowing, but that rate cuts could also come if the job market falls apart unexpectedly.

• The overall takeaway here: This is shaping up to be a slog of a summer for Fed policy as officials take a wait-and-see approach and avoid declaring victory early.

That’s a wrap. Chair Powell is done speaking following the Fed’s decision to keep interest rates steady in June.

Thomas Simons, an economist with Jefferies, observes that the Fed’s threshold for how much consistent data it wants to see before changing policy may have risen. “The Fed is clearly shy about embracing the evidence of disinflation shown this morning after misjudging the transitory nature of inflation earlier in the cycle,” he wrote in a note.

Stocks have changed direction again and are now rising. Powell appears to have come through this news conference without upsetting markets. The S&P 500 is now up 1.3 percent for the day.

Powell says the Fed is watching carefully signs that household finances have become more strained. Credit card balances and defaults have both gone up, but so far most households appear to be in decent financial shape, he says.

Asked again about housing costs, Powell sticks to the conventional wisdom that the slowdown in rents seen in the private-sector data will ultimately show up in official statistics. That process has taken longer than most forecasters expected, and some economists have begun to question whether the housing market might have changed in more lasting ways.

Though Powell has always been emphatic that the election has no bearing on the committee’s decisions, the political implications of when they cut will mount as November approaches, since the first step down will likely prompt a stock market rally favoring President Biden.

Powell says he has no “definitive answer” as to why people are not happier about the economy and lays out some positive indicators.

Three does appear to be a trend for Powell’s purposes. The committee “didn’t take much signal” from hot inflation readings in the first two months of the year, but once they got a third, that prompted a change in attitude toward maintaining rates higher for longer.

Housing costs have been one of the most stubborn categories of inflation, and progressive groups have criticized the Fed on the grounds that their policies will do little to help and might actually hurt. But Powell argues that the best thing the Fed can do for housing is to bring down inflation so that then it can cut interest rates, which would allow the housing market to normalize.

Powell is asked what would be the point of cutting rates if, as the forecast contemplates, unemployment and inflation remain very similar at the end of the year to where they are now. He answers that eventually, high borrowing will take a toll. “If you just set policy at a restrictive level, eventually you will see real weakening in the economy,” he said.

“We can’t know what the future holds,” Powell says, summarizing the entire tone of this news conference.

Given that the economy has stayed strong, and inflation has proved stubborn, some economists have been asking whether the Fed’s policies are actually doing much to tamp down growth — in economics jargon, whether rates are as “restrictive” as the Fed believes. Powell says he is confident that rates are restrictive, but says there are still many short-term factors complicating the picture.

Powell nods to the inconsistencies in last's weeks jobs report, where a survey that polls businesses showed much larger job gains than a survey of households, which has shown almost no employment increase over the past year. “Sometimes you cant reconcile the differences,” he said, meaning the Fed has to deal with uncertainty.

Markets have so far held relatively steady as Powell has been talking but the stock market is sliding a little as the chair acknowledges that hot inflation reports earlier in the year pushed up the forecast for inflation, in turn delaying when the Fed might start to cut interest rates.

As expected, the “dot plot” of interest-rate projections is a major topic of discussion between Powell and reporters. The median projection of Fed officials is regularly quoted as the clearest estimate of where policy is headed. You can see in the chart that the middle projection now suggests just one quarter-point cut by the end of the year, and several more in 2025.

Powell says that the labor market was “overheated” two years ago, but has come into “much better balance” since then. But he doesn’t say directly whether he thinks it needs to cool further.

When asked whether a September rate cut is still possible if inflation continues to come in softer, even though only one cut is forecast, Powell cautioned against reading the different scenarios in the dot plot as a definitive plan. “I would look at all of them as plausible,” he said.

Powell notes that when there is a big data release like today, officials are allowed to update and “some people do, some people don’t. Most people don’t, but you have the ability to do that.”

As the question-and-answer session begins, Steve Liesman of CNBC points out that the Fed’s forecasts imply that core inflation will actually pick up as the year continues. Powell says that’s because some of the very low inflation readings from last year will drop out of the 12-month window that goes into year-over-year inflation calculations.

Turning to monetary policy, Powell says Fed officials still “need to see more good data to bolster our confidence” that inflation is returning to their 2 percent target before they will decide it is time to cut rates.