The Federal Open Market Committee (FOMC) did not announce any federal fund rate cuts at its June meeting, which concluded Wednesday afternoon.
The decision to keep interest rates in the 5.25%-to-5.5% range was expected — even though the Consumer Price Index (CPI) report for May showed inflation rates dropping more than expected. Rates have been in that range since July 2023,
The inflation rate dropped to 3.3% in May, when it was expected to stay at 3.4%. Core inflation, which excludes food and energy prices, fell to 3.4%, also its lowest level since April 2021.
May was the second month in a row in which inflation rates as measured by the CPI fell. While it was not enough to get the FOMC to budge on the federal funds rate, the fact that it trended lower for two straight months indicates it’s heading in the right direction.
The FOMC also released its quarterly summary of projections (SEP) or dot plot, which shows the consensus is now at only one interest-rate cut this year. Analysts had projected that the Fed would cut rates twice, so this was a bit of a disappointment.
In March, the consensus was calling for three rate cuts.
Rates stay the same
The FOMC’s statement said the committee “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%. In addition, the committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.”
The committee added that it will “carefully assess incoming data, the evolving outlook, and the balance of risks” when considering any changes to the federal funds rate.
In his press conference on Wednesday afternoon, Federal Reserve Chair Jerome Powell noted that the recent CPI readings have been more favorable than they were earlier this year. However, he added that the committee still needs to “see more good data” to have confidence that inflation is moving toward 2%.
Powell also clarified that the May CPI readings were considered in this decision and the SEP, although they were released during the FOMC meeting on Wednesday morning. He added that the May CPI numbers were better than expected and showed good progress.
“We welcome more like that,” Powell said of the May CPI report.
However, the May CPI readings didn’t build enough confidence among FOMC members to warrant loosening policy at this point.
Diving into the dots
The Fed’s dot plot indicated only one interest-rate cut this year, down from three in the March report. These are obviously projections that are subject to change based on incoming data.
However, eight FOMC members called for two rate cuts this year, while seven called for one, and four said there would be no cuts. Thus, with 11 FOMC members projecting no more than one rate cut and eight members estimating two, the consensus is considered one.
However, the FOMC consensus for 2025 currently calls for four rate cuts, which is one more than was anticipated in March. That would bring the federal funds rate down to the 4%-to-4.25% range.
For 2026, the committee expects four more interest-rate cuts, with the consensus projecting a 3%-to-3.25% range.
As far as inflation, the consensus expects a 2.6% inflation rate by the end of 2024 as measured by the Personal Consumption Expenditures (PCE) Index. The prediction in March was for 2.4%. The PCE as of April was 2.6%.
The committee estimates that the PCE rate will be 2.3% at the end of 2025 and 2% at the end of 2026.
Powell said inflation projections for 2024 changed based on the higher inflation rates in the first quarter of the year, among other factors. However, Powell added that they are only estimates and are subject to change based on the data.
The dot plot also showed that the committee expects the economy to grow by 2.1% in 2024 and by 2% in both 2025 and 2025.
Markets shrug it off
The markets did not react negatively to the news. The S&P 500 initially dipped right after the FOMC statement was released, but 90 minutes later, it was back up near its intraday high of 5,445, up 1.2%. The Russell 2000 was up 2.2% while the Nasdaq jumped about 300 points, or 1.7%.
No changes to the federal funds rate were expected, so the results were already baked into market prices. As a result, even though the dot pot showed only one cut, most members still said two cuts as their top choice.
Further, the solid inflation data from earlier in the day likely resulted in rising investor confidence that things are headed in the right direction.
