Foresees one rate cut for the remainder of this year

Prior to the Federal Reserve (FED) announcement, it was reported that May’s inflation decelerated to 3.3% annually, compared to the expected 3.4% and the previous month’s rate. It is important to note that, on a monthly basis, inflation remained unchanged. Core inflation also improved, coming in at 3.4% annually compared to the expected 3.6% and the forecasted 3.5%. In this context, the FED made the unanimous decision, widely anticipated by the market, to maintain the target range for the federal funds rate at 5.25% – 5.50% (its highest level in the last 22 years).

The statement reiterated that the latest employment indicators have shown solid performance, while inflation has decreased over the past year, although it remains elevated. It highlighted that there has been modest progress toward the Committee’s 2% inflation target in recent months. Therefore, the Committee reiterated that it does not expect it to be appropriate to reduce the target range of the reference rate until there is greater confidence that inflation is moving sustainably toward its objective, while remaining very attentive to inflation risks.

On the other hand, the FED updated its macroeconomic outlook, significantly adjusting expectations for possible cuts to the reference rate. It now anticipates only one cut of 25 basis points (bps) for the remainder of the year, down from the March estimate, which suggested the possibility of three cuts (the market had been expecting two cuts). Thus, the federal funds rate would end the year at an average of 5.1%, compared to the current 5.4% and the previously anticipated 4.6%. For 2025, the new estimate suggests that the rate would stand at 4.1%, up from the previously forecasted 3.9%. Regarding the economic outlook, the GDP growth expectation remains at 2.1% for 2024 and 2% for 2025. The unemployment rate did not undergo significant changes for either year, remaining around 4%. However, estimated core inflation (excluding volatile components such as food and energy), measured through the Core PCE, rebounded slightly to 2.8% from 2.6%, while the estimate for 2025 rose slightly to 2.3%.

During his press conference, Jerome Powell commented that monetary policy is well-positioned and that if the economy remains strong and inflation persists at elevated levels, the FED would be prepared to maintain rates within the current range. He also emphasized that the FED’s estimates are not necessarily indicative of the decisions the Committee might take. Finally, Powell stressed the importance of seeing consistent improvement in inflation before applying a rate cut. He reminded that the baselines for inflation on an annual basis for the remaining months of the year will not be easy to surpass, which could result in continued elevated readings.

FED Indicators Update (June vs. March)

Source: Federal Reserve

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