The updated projection shows the likelihood of one rate cut by the end of 2024.
For the seventh consecutive Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) elected to hold interest rates steady. The decision, announced on June 12 at the end of the two-day session, was widely assumed by market participants given the Fed’s higher-for-longer stance. The federal funds rate target range remains at 5.25%-5.50%, as it has since July 2023.
As part of this FOMC meeting, an updated Summary of Economic Projections and dot plot were released and there were changes compared to the last release in March, most notably the number of projected rate cuts by the end of 2024. That number dropped to one cut, down from the March projection of as many as three cuts.
“Although Fed officials are saying that they consider today’s federal funds rate restrictive enough, the truth is that by not lowering interest rates more this year, it means that they are tightening monetary policy, as the real federal funds rate will continue to move higher as inflation continues to come down,” said Raymond James Chief Economist Eugenio Alemán.
The updated dot plot forecasts up to four rate cuts in 2025 and 2026, up from three in March’s projection. The long-term federal funds rate was also moved higher, from 2.6% in March to 2.8% during this SEP projection.
The SEP also showed no change in the Fed’s expectations for GDP growth compared to its March expectation while raising the rate of unemployment in 2025 to 4.2% from 4.1% during the March SEP projection. The Fed SEP is now expecting PCE inflation at 2.6% in 2024 versus a 2.4% rate in the March SEP while core PCE inflation was increased to 2.8% in 2024 compared to 2.6% in the March release of the SEP.
Raymond James Chief Investment Officer Larry Adam noted that the Consumer Price Index report, which was released the morning of June 12, ahead of the afternoon’s FOMC decision, had greater impact on markets than the Fed’s meeting, with the S&P 500 moving to another record high (it closed above 5,400 for the first time), yields falling and the dollar weakening.
“The insights of the CPI support two of our expectations for the economy: that inflation is resuming its decelerating path and that the economy is slowing,” said Adam. “Lower prices included in the CPI for new vehicles, apparel, airfares and energy is a sign of both of these dynamics – a slowing consumer and downward price pressures. The point is that this is real data – a report card on the economy.”
In its post-FOMC meeting statement, the Fed noted that “there has been modest further progress toward the Committee’s 2% inflation objective.” That’s a shift from the April-May meeting and shows that the Fed is beginning to see signs of easing inflationary pressures. The Fed is also continuing to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.
Fed Chair Jerome Powell noted in his post-meeting press conference that the Fed is still looking for greater confidence that inflation data is moving toward the stated 2% goal.
“We’ll need to see more good data to bolster our confidence that inflation is moving sustainably towards 2%,” said Powell.
“Given the fluidness already year-to-date in the Fed’s forecasts, more than six months until the end of the year gives plenty of time for the Fed expectations to move closer to our view of two rate cuts this year,” said Adam.
The next FOMC meeting takes place July 30-31.
All expressions of opinion reflect the judgments of the Raymond James Chief Investment Officer and Raymond James Chief Economist and are subject to change.
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