Policymakers then expect both growth and inflation to moderate further in 2025.
Washington:
The U.S. Federal Reserve kept its key lending rate unchanged on Wednesday and planned just one rate cut this year, down from three expected in March, after inflation stagnated in the first quarter.
The Fed voted unanimously to keep its benchmark interest rate between 5.25 and 5.50 percent and said “modest” progress had been made toward its long-term inflation target of 2 percent.
The announcement suggests that central bank officials remain cautious about cutting rates too soon, despite consumer inflation data published on Wednesday, which pointed to a slowdown in the rate of price increases in May.
The annual consumer price index (CPI) hit 3.3% last month, down 0.1 percentage point from April and remained unchanged on a monthly basis, the Labor Department said. This was a little below expectations.
Fed Chairman Jerome Powell welcomed the inflation data during a press conference on Wednesday, but added that the US central bank needs to see more “good inflation readings” before gaining enough confidence to consider cutting. of interest rates.
He added that if the U.S. economy remains strong and inflation persists, the Fed would be “prepared to maintain the current target range for the federal funds rate as long as appropriate.”
Just a rate cut
The surprise of the day came in the Fed’s updated economic forecasts, drawn up by the 19 members of its rate-setting Federal Open Market Committee (FOMC).
Policymakers lowered their individual forecasts for the number of rate cuts they expect this year, lowering the median projection for the end of 2024 to the midpoint between 5.00 and 5.25 percent.
This means that FOMC participants only expect a cut of 0.25 percentage points before the end of the year, two less than in the last update in March.
The announcement caught some analysts by surprise, while others suggested the Fed would have to backtrack in the coming months.
“The tapering of two of the easings previously expected for this year is unnecessarily aggressive,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a note to clients.
He added that the Fed will likely need to backtrack for a summer labor market softening and better progress on inflation.
“It will be a difficult decision between one or two 25 basis point (basis point) rate cuts this year,” Wells Fargo economists wrote in a note to investors, adding that their forecast remains for two cuts this year.
FOMC participants outlined a median cut of four-quarters of a percentage point for next year and four more in 2026.
In their economic forecasts, Fed officials also raised their forecast for global inflation this year to 2.6%, an increase of 0.2 percentage points, and kept their growth outlook unchanged at 2.1%.
Policymakers then expect both growth and inflation to moderate further in 2025.
September runs away
Better-than-expected inflation data on Wednesday prompted futures traders to raise their expectations for an interest rate cut by mid-September to more than 70 percent, a sharp increase from around 50 percent. percent from Tuesday, according to data from CME Group.
But the Fed’s rate decision dampened optimism slightly, with investors reducing their expectations to just over 60 percent.
“The Fed likely does not have enough confidence that the economy is cooling to cut rates by September,” KPMG chief economist Diane Swonk wrote in a blog after the Fed’s rate decision, adding that the KPMG still expects a cut in December.
“Inflation looks really sticky and is holding up quite a bit,” Dan North, senior economist at Allianz Trade Americas, told AFP, adding that the Fed “always waits a long time” before starting to cut rates.
“We expect a series of more favorable inflation releases — in the wake of Wednesday’s weaker-than-expected May CPI report — to pave the way for the Fed to cut rates in September,” wrote Nancy Vanden Houten, chief U.S. economist at Oxford Economics. in a note to customers.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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