Federal Reserve officials left interest rates unchanged in their June decision and predicted they would reduce borrowing costs only once before the end of 2024. This is a sign that the country plans to be patient before turning a corner in the fight against runaway inflation.
The central bank rapidly raised interest rates from early 2022 to July 2023, reaching 5.3%, the highest in more than 20 years. They have maintained this policy since, hoping that higher borrowing costs will slow demand from consumers and businesses enough to curb rapid price rises.
Inflation will steadily slow in 2023, heading into 2024 with Federal Reserve officials expected to cut interest rates three times this year. But price increases have been surprisingly stubborn at the start of the year, and policymakers have had to postpone plans to cut interest rates for fear of lowering borrowing costs too early.
Now the picture is in the process of changing again. New Consumer Price Index inflation data released on Wednesday reaffirmed that inflation rigidity in early 2024 was an increase in pace rather than a change in trend. Price increases cooled noticeably in May. But it is becoming too late for the Fed to make the three interest rate cuts it had expected as of March, when policymakers last released economic forecasts. In a new forecast Wednesday, officials predicted they would cut interest rates just once, to 5.1%, by the end of 2024.
Federal Reserve officials gave no clear hints about when rate cuts might begin. They met four more times this year in July, September, November and December.
Federal Reserve Chairman Jerome H. Powell said at a news conference after the announcement that officials were still seeking “greater confidence” that inflation would move sustainably to 2% before cutting interest rates.
“The economic outlook is uncertain,” Chairman Powell said. “We are very careful about inflation risks.”
Powell explained that moving policy too early or too much could reverse inflationary progress, but moving policy too late or too little could “unduly” weaken economic activity. He made it clear that the Fed's new outlook is not a firm plan or decision, but that circumstances can change.
The Fed's prediction of a single interest rate cut may come as surprising news to investors and economists. Many of them were expecting the Fed to target two interest rate cuts before the end of the year. But the major revision came as Fed policymakers shifted toward greater caution. According to the Federal Reserve's forecast, officials expect inflation to be more stubborn in 2024 than previously expected. Overall inflation could end the year at 2.6%, up from previous estimates of 2.4%. Central bankers also predicted that unemployment could be slightly higher next year than previously expected.
Policymakers adjusted their statement to reflect that price increases are starting to cool again after stalling earlier this year.
“Recent months have seen some additional progress toward the Committee’s 2% inflation target,” the Fed said in a statement.
Chairman Powell signaled that the Fed's inflation outlook is “conservative.”
“We welcome today’s reading and hope there will be more such readings,” Mr Powell said.
The overall picture painted by the Fed's economic outlook was cautious, but there were some positive aspects.
Policymakers expected growth to continue even if interest rates remain high this year. And Fed officials expected to cut interest rates faster next year, suggesting that some of the rate cuts they had originally planned for 2024 were simply postponed. They now expect four rate cuts in 2025, up from three previously. The interest rate was expected to be 3.1% at the end of 2026, unchanged from the March estimate.
However, the Federal Reserve has raised its outlook that interest rates will remain stable in the long term. Long-term interest rates are rough estimates of what the economy is set to perform evenly over time. So, if interest rates are higher than this, you can expect the economy to slow down, and if interest rates are lower than this, you can expect the economy to slow down. To speed things up. Officials now see the long-term “neutral” setting at 2.8%, up from 2.6% previously, suggesting that today's policy settings are putting the brakes on growth a little less aggressively than previously understood.