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In a largely anticipated move, the Federal Open Market Committee, or FOMC, has opted on Wednesday not to change the federal funds rate. Rather, it has maintained its current target range between 5.25% and 5.50%. In addition, the new FOMC dot-plot projections indicate only one interest rate cut is likely this year.
The Federal Reserve has not raised or cut interest rates since July 2023, but it seems increasingly likely it will pivot to rate cuts before the end of 2024.
This month, the Fed will also start tapering its monthly runoff of Treasury securities and agency mortgage-backed securities, or MBS, opting for a maximum runoff of $25 billion in Treasurys and $35 billion in MBS per month moving forward.
The combination of a strong labor market, resilient U.S. consumers and a tight housing market stalled the Federal Reserve’s progress on inflation in the first half of 2023. But even after getting a positive inflation reading earlier in the day, the FOMC said it will need to see more data in coming months to confirm inflation is headed definitively toward its 2.0% goal.
Economists and investors have anticipated multiple interest rate cuts in the second half of 2024, but Federal Reserve officials have repeatedly warned against the dangers of cutting rates too soon and triggering a rebound in inflation.
The Inflation Tightrope
The Federal Reserve is attempting to bring down inflation by raising interest rates without tipping the U.S. economy into a recession. However, navigating a “soft landing” for the economy may prove difficult because higher interest rates increase borrowing costs for both companies and consumers, slowing economic activity.
On Wednesday morning, the Labor Department reported the consumer price index, or CPI, rose 3.3% year-over-year in May, down from a 3.4% gain in April and a 40-year high of 9.1% in June 2022.
In late May, the Commerce Department reported the core personal consumption expenditures, or PCE, price index was up 2.8% in April, in line with its annual gains in February and March. Core PCE excludes volatile food and energy prices and is the Federal Reserve’s preferred inflation measure. Its long-term target for core PCE inflation is just 2.0%.
Meanwhile, the U.S. labor market has remained solid, making the FOMC’s fight against inflation more difficult. The Labor Department reported the U.S. economy added 272,000 jobs in May, exceeding economist expectations of 190,000 new jobs. The Labor Department reported U.S. wages were up 4.1% year-over-year. The unemployment rate ticked higher to 4.0% in May but remains historically low.
“Our economy has made considerable progress toward both goals over the past few years,” Fed Chair Jerome Powell said in his post-meeting press conference on Wednesday.
“The labor market has come into better balance, with continued strong job gains and a low unemployment rate. Inflation has eased substantially from 7% to 2.7%. But it’s still too high.”
Economic Projections
In addition to its monetary policy decisions, the Federal Reserve also updated its long-term economic projections on Wednesday. Committee members now estimate a median fed funds rate of 5.1% in 2024, up from their previous 4.6% projection back in March. The new projections suggest one interest rate cut by the end of 2024.
The committee projects a 2024 U.S. unemployment rate of 4%, in line with its March estimate. Fed members also maintain their 2024 U.S. gross domestic product, or GDP, growth projection of 4.1%. The Federal Reserve left its 2025 GDP growth projection of 2.0% unchanged as well.
On the inflation front, the Fed’s projected 2024 core PCE inflation rate increased from 2.4% to 2.6%. FOMC members see inflation continuing to cool to 2.3% in 2025.
Economists have been concerned that it will be difficult for the Fed to get inflation under control without triggering a recession. However, the S&P 500 is up 14.5% year-to-date, and S&P 500 constituents have reported 5.9% annual earnings growth in the first quarter. The S&P 500 traded higher on Wednesday following the CPI inflation reading and the FOMC announcement.
Charlie Ripley, senior investment strategist for Allianz Investment Management, says Wednesday’s cool CPI reading was likely a relief for the FOMC.
“Today’s inflation data should be another feather in the cap for Chairman Powell and raise the confidence for the rest of the voting members. More importantly, as we look further out on the calendar, the distance from here to the first rate cut of the cycle appears to be rapidly approaching,” Ripley says.
What’s Next?
According to CME Group, markets are currently pricing in an 85.5% chance the Fed will once again choose to maintain interest rates at their current levels at its next meeting, which concludes on July 31. However, investors and central bankers have roughly six weeks of economic data to monitor between now and then.
Jeffrey Roach, chief economist for LPL Financial, says the FOMC statement and updated economic projections provided investors little clarity on the timing of the first rate cut.
“Barring any exogenous shocks, the economy will slowly converge to the Fed’s target. Since parts of the economy are less sensitive to interest rates in this business cycle, the Fed is constrained to keep rates higher for longer,” Roach says.
In the near term, the Census Bureau will shed some light on how well U.S. retailers are holding up in the high-rate, inflationary environment when it releases its May retail sales report on June 18. In addition, investors will be watching for the May core PCE reading on June 28 to confirm inflation is still trending lower heading into the second half of the year.
Federal Open Market Committee (FOMC) FAQs
What is the Federal Reserve?
The Federal Reserve is the central bank of the United States, and is generally considered to be the most powerful central bank in the world. Often referred to as the Fed, it was founded to direct monetary policy and manage the financial system. A seven-member board governs the Fed, and there are 12 Federal Reserve Banks in regions throughout the U.S.
The Federal Open Market Committee (FOMC) is the main policy making body of the Fed. The FOMC sets the federal funds target rate and makes other monetary policy decisions for the Fed. The FOMC meets eight times a year to vote on interest rates and policy priorities.
There are 12 members of the FOMC:
- The seven members of the Fed Board of Governors, led by Fed Chair Jerome Powell.
- Five of the 12 Federal Reserve Bank presidents, although the head of the Federal Reserve Bank of New York is a permanent member of the FOMC. The other four voting positions are filled on a rotating basis by the presidents of the other Federal Reserve Banks across the country. Even though most presidents don’t vote, they can all attend the meetings and debate policy.
When is the next FOMC meeting?
The next FOMC meeting is scheduled for June 11-12. The FOMC hold eight scheduled meetings a year, one every six weeks or so. The committee can also meet whenever it feels necessary and believes that it needs to act, such as during a financial crisis.
When are the FOMC minutes released?
The FOMC releases minutes of its meetings three weeks after the most recent meeting. A full transcript isn’t available for a full five years after a meeting.
How many times will the FOMC cut rates in 2024?
The FOMC raised interest rates 11 times from 2022 to 2023, putting the federal funds target rate at 5.25% to 5.50%. However, the Fed has not rasied rates since July 2023.
The CME Group’s FedWatch tool shows a better than 60% chance the Fed will cut rates by its September meeting.
