The Federal Reserve said on Wednesday it kept interest rates unchanged and plans to cut rates just once in 2024 as policymakers wait for more evidence that U.S. inflation is starting to slow in earnest.
The central bank kept the federal funds rate — the interest rate banks charge each other for short-term loans — in the 5.25% to 5.5% range, its highest level in 23 years since July 2023.
Inflation has shown some signs of easing but remains above the central bank's 2% annual target, and the Fed has been cautious about cutting rates due to persistent inflation. The government said on Wednesday that consumer prices rose 3.3% in May from a year earlier, easing slightly from April's 3.4% increase.
In a statement, the Fed said it has made “moderate” progress in recent days in bringing inflation closer to its target, but added that the pace of price increases “remains elevated.” Inflation-weary consumers will likely face higher borrowing costs through 2024, it added, and the Fed reduced interest rate cuts this year to one, down from three as originally expected.
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According to the latest CPI report, gasoline prices are falling while rent and some grocery costs are rising.
Federal Reserve Chairman Jerome Powell said Wednesday's consumer price index report was encouraging but noted the central bank wants to wait to see more evidence that inflation is on track to return to about 2% in coming months before lowering its benchmark interest rate.
“While we view today's report as progress and confidence-building, we do not believe we have enough confidence at this time to justify beginning to ease policy,” Powell said at a news conference discussing the Fed's latest outlook.
When will the Federal Reserve cut interest rates?
The Fed's interest rate policy affects mortgage, auto loan, credit card interest rates and other borrowing costs for consumers and businesses. The lowering of its outlook for rate cuts means those borrowing costs are likely to remain higher for a longer period.
“The Fed's reduction in the number of rate cuts from three to one will disappoint those hoping for lower interest rates over the summer,” Lisa Sturtevant, chief economist at Bright MLS, said in an email. “Mortgage rates, which have been long elevated, will likely remain in the high 6% range through the second half of the year.”
At his press conference on Wednesday, Chairman Powell did not say when the Fed would cut interest rates, its only scheduled cut of 2024. The Fed is scheduled to meet four times this year – in July, September, November and December. While most forecasters have ruled out a July cut, some economists say it's still possible the Fed could choose to cut rates at its September meeting, though that would depend on how inflation performs over the summer.
“Overall, there is no argument against a rate cut in September. It all depends on upcoming data,” Capital Economics said in a research note.
Towards 2025
Powell added that some Fed officials are pushing out their expected rate cuts into 2025. The Fed's economic outlook summary, also released today, projects four rate cuts next year, with the policy rate expected to fall to around 4.1% by the end of 2025.
“Any rate cuts that would have been made this year will happen next year,” Powell said. “There will be fewer cuts on average this year, but one more next year. By the end of 2025 and 2026, we'll be back to roughly where we were on schedule, just later.”
Powell reiterated on Wednesday that the central bank prefers to keep interest rates high until inflation is closer to its 2% annual target, because cutting rates too soon could send prices soaring again.
Still, the Fed's quarterly projections of future rate cuts are by no means set in stone: Policymakers frequently revise their plans for rate cuts or hikes depending on how economic growth and inflation measures change over time, a point Powell emphasized Wednesday.
“The inflation numbers today are much more positive,” he said, adding: “One indicator is just one indicator. I don't want to be too swayed by any single piece of data.”
Voters and inflation
Central bank interest rate policy over the coming months could also influence the election. Many voters have a pessimistic view of President Joe Biden's economy, even though the unemployment rate is low at 4%, hiring is strong and consumers continue to spend.
That's mainly because prices remain much higher than they were before the pandemic hit in 2020. High borrowing rates impose an additional financial burden.
Despite strong economic data, many believe the U.S. is in a recession.
Asked if he had a message for Americans who feel pessimistic about the economy, Powell said the steps needed to curb inflation could be painful. “But the ultimate pain is high inflation over a prolonged period,” he said. “The people who feel the worst pain from inflation are those at the fringes of the economy.”
Powell added, “I don't think anybody has a clear answer for why Americans should be happy with the economy. What Americans are experiencing is up to them.”
—Reported by The Associated Press.
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Amy Picchi