The US Federal Reserve announced its fourth interest rate decision for 2024 on Thursday, after a two-day Federal Open Market Committee (FOMC) meeting, where it unanimously voted to leave the key benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent for the seventh straight meeting, which was broadly in line with Wall Street estimates and market analysts.
Separate US government data on Wednesday revealed that the annual consumer price index (CPI) came in at 3.3 per cent in May, down 0.1 percentage point from April and unchanged on a monthly basis, which was slightly below Street expectations. The core CPI, which excludes food and energy, rose 0.2 per cent in May and 3.4 per cent from a year earlier, the slowest pace since 2021.
US inflation cooled for the second straight month in May and raised interest rate cut expectations among several Wall Street analysts, who believe that the Fed's hawkish stance may soon get stale over positive macroeconomic print. Market experts do not completely buy Fed chair Jerome Powell's hawkish remarks after the June FOMC policy decision was unveiled on June 12.
The US central bank has maintained its key overnight interest rate at the 23-year high-mark since July 2023. Despite US inflation falling further to the target range in recent months, the Fed does not expect to reduce interest rates until it has “gained greater confidence" that inflation is moving sustainably towards its two per cent level.
'The Committee seeks to achieve maximum employment and inflation at the rate of two per cent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year,'' said the Fed in today's statement. 'The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,'' it added.
The US Fed said in its statement that "modest" progress had been made toward its long-term inflation target of two per cent, adding that they expect only one rate cut in 2024, down from the three projected in March.
The Fed's dot plot, which the US central bank uses to signal its outlook for the path of interest rates, shows the median year-end projection for the federal funds rate rose to 5.13 per cent. This means that FOMC participants only expect one 0.25 percentage point cut before year-end.
The median estimate for the end of 2025 increased to 4.13 per cent, implying an additional four quarter-of-a-percentage-point cuts next year. FOMC penciled in an additional four cuts in 2026.
As part of the updated quarterly economic forecasts issued by Fed, policymakers projected that the economy will grow 2.1 per cent this year and two per cent in 2025, the same as they had envisioned in March.
They expect core inflation to be 2.8 per cent by year's end, according to their preferred gauge, up from a previous forecast of 2.6 per cent. Fed also expects that unemployment will stay at its current four per cent rate by the end of this year and edge up to 4.2 per cent by the end of 2025.
A softer-than-expected CPI reading makes two interest-rate cuts from the Federal Reserve this year “very likely," according to Carlyle Group Inc.’s Jason Thomas.“Certainly September is in play" for the first rate cut, said Carlyle’s head of global research and investment strategy on Bloomberg Television.
“Given how resilient the economy has proven under these seemingly high real interest rates" four cuts would be needed to get the neutral rate — a theoretical interest rate that would maintain a healthy economy without generating too much inflation — down to 4.35 per cent, Thomas added.
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People betting for fewer than four cuts to reach the neutral rate are likely expecting economic shock, said Thomas. “That’s something that doesn’t look like is going to take place naturally," he added.
The Fed’s rate hikes have helped lower annual inflation from a peak of 9.1 per cent in June 2022 to 3.2 per cent. However, it has made borrowing costlier for businesses and households. The policymakers now face the task of keeping rates high enough to slow spending and defeat high inflation without derailing the economy.
‘’The economy seems quite robust, and unemployment rates are unlikely to increase significantly. However, as wage increases moderate, inflation should start easing faster, potentially forcing the Fed to cut rates sooner than their dot plot projections suggest,'' said Dr. Vikas V. Gupta, CEO & Chief Investment Strategist, OmniScience Capital.
After the latest inflation data, analysts still hope for a September rate cut. ‘’We believe that the Fed has shown a tinge of dovishness in its commentary, with the reaction to incoming data expected to be much quicker than earlier… With no indication on the timing of a rate cut yesterday, our sense is that the chatter surrounding a rate cut in September is still not off the table,'' said Manish Chowdhury, Head of Research, StoxBox.
The Fed kicked off an aggressive monetary policy tightening cycle by raising the policy rate by 5.25 percentage points since March 2022 – in one of the swiftest Fed reactions to rising price pressures that had eventually hit a 40-year peak.
Inflation had cooled steadily in the second half of 2023, raising hopes that the Fed could achieve a rare ‘soft landing’, where it would manage to conquer inflation through rate hikes without causing a recession.
However, inflation was unexpectedly high in the first three months of 2024, delaying hoped-for rate cuts and potentially imperiling a soft landing. April and May's inflation data have renewed some hopes for the central bank.
The longer the Fed keeps borrowing costs high, the more it risks weakening the economy too much and causing a recession. Yet if it cuts rates too soon, it risks reigniting inflation, which is still volatile over geopolitical conflicts.
‘’Fed still finds inflation rate too high and doesn’t want to ease too early and face the risk of inflation coming back. Until inflation sustainably moves towards two per cent, we can’t expect any easing. At the most, we can expect only one cut during this year, not more. Fed will be totally data dependent until inflation is well anchored,'' said Manish Jain, Director of the Institutional Business (Equity & FI) Division at Mirae Asset Capital Markets.
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