Washington (TIP)- The Federal Reserve held interest rates steady on Wednesday, June 12, and pushed out the start of rate cuts to perhaps as late as December, with officials projecting only a single quarter-percentage-point reduction for the year amid rising estimates for what it will take to keep inflation in check. The markdown in the outlook for rate cuts, from three quarter-percentage-point reductions seen in the Fed’s March projections, was made despite the central bank’s acknowledgement in its new policy statement of “modest further progress” towards its 2% inflation target – an upgrade from its May 1 statement.
It coincided with an increase to 2.8% in the estimated long-run, or “neutral,” rate of interest, from 2.6%, which indicates policymakers have concluded the economy needs more restraint in order to finish the battle against rising prices.
Recent progress has been slow, and Fed officials now project a slightly higher end-of-year inflation rate of 2.6% versus the 2.4% anticipated as of March.
While rate cuts are now seen getting a likely later start and a slower pace this year than investors have anticipated, the Fed’s policy rate is seen falling fast next year, with reductions of a full percentage point in both 2025 and 2026.
The statement and new Summary of Economic Projections show a central bank wrestling over how to respond to data that many read as pointing to slower inflation – consumer prices in fact did not rise at all in May on a month-over-month basis, according to data released on Wednesday – but also to steady growth and job creation.
Higher Neutral Rate
The new projections show the economy still expected to grow at a slightly above-trend 2.1% this year despite a sluggish first quarter, and the unemployment rate remaining at its current 4% through the year.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low,” the Fed said in its statement.
Following little progress on inflation over the first months of the year, the result was a “dot plot” of projected policymaker interest rate forecasts that involved a near across-the-board shift higher in the rates considered needed to finish the battle against inflation.
Summed with a previous increase in the March projection, that neutral rate is now estimated at more than a quarter of a percentage point above where it ended 2023.
Coupled with recent debate over the possibility that the “neutral” rate of interest was higher than estimated, the new dot plot suggested Fed officials have concluded higher rates are needed over a longer period of time to keep inflation in check. Source: Reuters