Fed Keeps Rates Unchanged, Policymakers Expect Only One Rate Cut This Year

Fed Keeps Rates Unchanged, Policymakers Expect Only One Rate Cut This Year

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In its June 13 rate decision, the Federal Reserve announced that it would keep rates unchanged and that the timing for starting rate cuts might be delayed until December. Policymakers expect only one rate cut this year, by 25 basis points, believing that more economic tightening is needed to control inflation.

The Fed policymakers have significantly reduced their rate cut expectations from March's projection of three 25 basis point cuts, despite acknowledging in their new policy statement that "moderate further progress" has been made toward the 2% inflation target—a more optimistic view than the one expressed in the May 1 statement. The new forecast likely rules out the possibility of a rate cut before the U.S. presidential election on November 5.

At the same time, the Fed raised its estimate of the long-term or "neutral" rate from 2.6% to 2.8%, suggesting that policymakers believe more economic restriction is necessary to combat inflation.

With recent progress in disinflation being slow, Fed policymakers now expect the year-end inflation rate to be 2.6%, slightly higher than the 2.4% forecasted in March.

Following the statement and latest forecasts, futures traders continued to expect the Fed to start easing policy in September, with a potential second rate cut by the end of the year.

“Markets care more about whether there will be two rate cuts this year or just one,” said Brian Jacobsen, Chief Economist at Annex Wealth Management. “The Fed is essentially rescheduling the rate cut plans.”

Although it now seems that the start of rate cuts this year may be later and slower than investors expected, policy rates are expected to drop rapidly next year, with a full percentage point cut in both 2025 and 2026.

The new statement and Economic Projections Summary indicate that Fed policymakers are debating how to respond to recent data. Many believe recent data suggests slowing inflation but also indicate stable economic and employment growth.

Raising the Neutral Rate

The new forecasts show that despite a sluggish first quarter, the economic growth rate for this year is still expected to reach 2.1%, above trend levels, with the unemployment rate remaining at its current level of 4%.

The statement reads: “Recent indicators suggest that economic activity continues to expand at a robust pace. Job gains have been strong, and the unemployment rate has remained low.” Policymakers unanimously agreed on this week's decision.

Inflation progress has been minimal in recent months. As a result, according to the "dot plot," nearly all policymakers have raised their estimates of the rate levels needed to win the battle against inflation.

Combined with recent discussions about the neutral rate possibly being higher than expected, the new dot plot suggests that policymakers have concluded that higher rates will need to be maintained for a longer period to curb inflation. Policymakers now estimate the neutral rate to be more than 25 basis points higher than the level at the end of 2023, an estimate they had already raised in March.