Fed Policy: One Month of Good Data Is Not Enough

One softer-than-expected monthly inflation reading didn’t stop Federal Reserve officials from delaying the expected start of interest rate cuts.

On the same day that core consumer price index (CPI) inflation registered its softest monthly reading in almost three years, the Fed adjusted higher its estimate for where its policy rate would land at year-end. The new median rate projection is 5.1%, implying one 25-basis-point (bp) rate cut in 2024, instead of the three 25-bp cuts estimated in the previous projections back in March.

Overall, the CPI and Fed news did not bring much to change our near-term U.S. outlook: slowing but still solid growth, above-target inflation, and a patient Fed.

The Fed’s latest move came after core personal consumption expenditures (PCE) inflation – the Fed’s preferred gauge – dramatically reaccelerated in the first quarter, and trends suggested it would remain above target in the second quarter and beyond.

After these surprisingly firm core PCE readings earlier this year, Fed officials confirmed that they need to see a string of softer monthly inflation reports before they’ll become confident that inflation is moving sustainably back to 2%.