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Federal Reserve now expects to cut interest rates just once in 2024 amid sticky inflation

Federal Reserve holds interest rates steady
Federal Reserve holds interest rates steady 08:44

The Federal Reserve on Wednesday left its benchmark interest rate unchanged and penciled in only one rate cut in 2024 as policymakers await more evidence that U.S. inflation is cooling in earnest. 

The central bank kept the federal funds rate — or what banks charge each other for short-term loans — in a range of 5.25% to 5.5%. It has remained at that level, the highest in 23 years, since July of 2023. 

The Fed has been wary of cutting rates due to stubborn inflation, which is showing some signs of easing yet remains above the central bank's 2% annual target. Earlier on Wednesday, the government said consumer prices in May rose 3.3% on an annual basis, showing some easing from April, when the pace stood a tick higher at 3.4%. 

In its statement, the Fed said there has been some "modest" progress of late in lowering inflation closer to its target, but added that the pace of price increases "remains elevated." Inflation-weary consumers will likely have to bear higher borrowing costs throughout 2024, with the Fed adding that it's penciling in just one rate cut this year, down from the three reductions it had earlier forecast.

Gas prices fall as rent, some food costs increase, latest CPI report shows 04:06

Fed Chairman Jerome Powell said the Consumer Price Index report released earlier Wednesday is encouraging, but noted that the central bank wants to see more evidence in coming months that inflation is on a path to return to about 2% before moving to cut the benchmark rate.

"We see today's report as progress and building confidence, but we don't see ourselves as having the confidence that would warrant beginning to loosen policy at this time," Powell said in a press conference to discuss the Fed's latest outlook.

When will the Fed cut rates?

The Fed's rate policies affect the costs of mortgages, auto loans, credit card rates and other forms of consumer and business borrowing. The downgrade in their outlook for rate cuts would mean that such borrowing costs would likely stay higher for longer.

"The fact that the Fed scaled back the number of rate cuts from three to one is going to disappoint those who were hoping for a summer rate drop," said Bright MLS chief economist Lisa Sturtevant in an email. "Mortgage rates, which have remained higher for longer, will likely remain in the high sixes until later this year."

At Wednesday's press conference, Powell didn't address when the Fed might make its single projected rate cut in 2024, with the central bank scheduled to meet four more times this year in July, September, November and December. Although most forecasters rule out a July cut, some economists said the Fed could still opt to lower rates at its September meeting, although that will depend on how inflation plays out over the summer.

"Overall, there's nothing here that rules out a September rate cut. It all depends on the incoming data," Capital Economics noted in a research note.

Looking to 2025

Some Federal Reserve participants have pushed back their rate-cut expectations into 2025, Powell added. The Fed's Summary of Economic Projections, also released today, shows four cuts penciled in for next year, with the benchmark rate expected to dip to about 4.1% by the end of 2025. 

"Rate cuts that might have taken place this year, take place next year," Powell said. "There are fewer rate cuts in the median this year, but one more next year. By year-end 2025 and 2026, you are almost exactly where you would have been — it's just later."

Powell on Wednesday again stated that the central bank prefers keeping rates elevated until inflation falls closer to its 2% annual target because of the risk that cutting too soon could fuel another round of price spikes.  

Still, the Fed's quarterly projections of future interest rate cuts are by no means fixed in time. Policymakers frequently revise their plans for rate cuts or hikes depending on how economic growth and inflation measures evolve over time, something that Powell stressed on Wednesday. 

"Now we have today's inflation reading, which is very much more positive," he said, adding, "One reading is just one reading ... you don't want to be too motivated by any single data point."

Voters and inflation

The central bank's rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, many voters have taken a dour view of the economy under President Joe Biden. 

In large part, that's because prices remain much higher than they were before the pandemic struck in 2020. High borrowing rates impose a further financial burden.

Many think U.S. is in a recession despite strong economic data 04:05

Asked whether he has a message for Americans with downbeat views on the economy, Powell responded that the steps needed to reduce inflation can be painful. "But the ultimate pain would be a long period of high inflation," he said. "It's the people at the margins of the economy who experience the worst pain from inflation."

Powell added, "I don't think anyone has a definitive answer about why people are as happy about the economy as they should be. People experience what they experience."

—With reporting by the Associated Press.

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