The Federal Reserve Holds Steady, Signaling a Continued Fight Against Inflation

The Federal Reserve is targeting a range between 5.25-5.5%, the highest level in 23 years. A 25-point cut would lower the target range to between 5-5.25%. At the height of the pandemic, the Fed targeted a range between 0-0.25%, the lowest it had been since the Great Recession.

The Federal move surprised some market observers, holding its key interest rate steady on Wednesday while signaling that just one rate cut is expected before the end of the year. This decision reached following a two-day meeting of the Federal Open Market Committee (FOMC), marked a shift from the three rate reductions projected in March.

However, the committee’s decision reflects a cautious approach to monetary policy, acknowledging progress in curbing inflation while maintaining a stance of vigilance.

The FOMC’s “dot plot,” which illustrates individual participants’ rate expectations, indicates a more aggressive cutting path in 2025, with four reductions totaling a full percentage point anticipated.

However, for the period through 2025, the committee now sees five total cuts equaling 1.25 percentage points, down from six in March.

Federal Reserve Attempt at Inflation Ease

A notable development emerged in the projection for the long-run interest rate, which signifies a level that neither stimulates nor restricts growth. This projection moved up to 2.8% from 2.6%, reflecting a growing consensus among Fed officials that interest rates will remain elevated for a longer period.

The FOMC’s Summary of Economic Projections revealed an upward revision to the 2024 inflation outlook, reaching 2.6% or 2.8% when excluding food and energy. Both projections were 0.2 percentage points higher than in March.

The Fed’s preferred inflation gauge, the Commerce Department’s personal consumption expenditures price index, showed respective readings of 2.7% and 2.8% for April. The Fed prioritizes core inflation as a more reliable indicator of long-term price trends.

While inflation has eased from its peak of over 9% nearly two years ago, it remains above the Fed’s 2% target. The SEP forecasts inflation returning to the 2% target, but not until 2026. The recent release of the consumer price index for May, showing flat inflation on the month and an annual rate that edged lower from April, provided some reassurance.

Despite the positive developments, Fed Chair Jerome Powell emphasized that the central bank is not yet prepared to begin loosening monetary policy. He described the May CPI report as “progress” but stressed that the Fed needs to see more evidence of inflation returning to its target before considering rate reductions.

The dot plot, which illustrates individual Fed officials’ projections for future interest rates, reveals a notable change compared to the March projections. Previously, only two officials saw no rate cuts for the remainder of 2024. This time, that number has doubled to four, indicating a hardening of the Fed’s resolve to tame inflation.