The Fed Holds Rates Steady and Remains Patient

As expected, the Federal Reserve kept the target range for the federal funds rate at 5.25% to 5.50% at the June meeting of the Federal Open Market Committee (FOMC). It reduced its median estimate for interest rate cuts of 25 basis points (or 0.25%) by the end of this year to one from three at the last meeting, but it was a very close call with roughly half of the members looking for two cuts.

The quarterly Summary of Economic Projections showed that the Fed expects inflation to remain elevated in the near term but anticipates it will fall in 2025, allowing for as many as four rate cuts. Notably, the long-run interest rate forecast moved up from a median estimate of 2.6% to 2.8%.

The FOMC's latest dot plot

The FOMC's latest dot plot

Source: Bloomberg. FOMC DOT Plot as of June 12, 2024.

The Fed's confidence in sustaining low inflation "not there yet"

The Fed has indicated that it is waiting to initiate rate cuts until it is "confident" that inflation will reach its 2% target and remain low. Based on comments from Federal Reserve Chair Jerome Powell, the committee "is not there yet." He acknowledged recent progress on bringing inflation down, but apparently the committee wants to see a few more months of favorable readings to feel confident about cutting interest rates.

It was hard to align the economic estimates for elevated inflation and solid economic growth with the Fed's plans to cut rates. The explanation offered by Powell was that with policy currently restrictive, there is room to lower rates as a more stable inflation outlook is established. He cited the uncertainty created earlier in the year when inflation readings failed to show progress. Presumably, a few more months of good inflation readings would solidify the Fed's confidence that inflation can decline further toward its goal.