Quick Thoughts: Rate cuts will come—eventually

As was widely expected, the Federal Reserve (Fed) decided to leave the fed funds rate unchanged at the Federal Open Market Committee (FOMC) meeting that concluded on June 12, with members voting unanimously to maintain the target rate range at 5.25%–5.50%.

The June FOMC meeting was a quarterly one, and the Fed’s updated “dot plot” (formally named The Summary of Economic Projections or SEP) did show that the median expectation is for one cut of 25 basis points by year’s end, down from a median of three cuts as of three months ago. Also, four Fed officials now do not believe that any cuts will need to happen by the end of 2024, which was two as of a few months ago. One Fed official actually conveyed that there may not even be a case to cut rates this year or next. Overall, this was clearly a hawkish announcement. However, the median FOMC member projects five cuts by the end of 2025, down only one from the six cuts expected as of the last SEP.

The Fed’s long-run neutral rate (where monetary policy is not overly restrictive nor too accommodative) was modestly higher at 2.8%. Its 2024 and 2025 gross domestic product growth expectations stayed at 2.1% and 2%, respectively. The Fed indicated that economic activity has continued to expand at a modest pace. It also believes that the job market is strong and unemployment will remain at the current level of 4% throughout 2024—with the unemployment rate only ticking slightly higher to 4.1% by the end of 2025.

Also as expected, the Fed communicated to the markets that the voting members will continue to slow down their balance sheet trimming.

Fed Chair Jerome Powell also repeated that the “committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2% target.” The Fed’s preferred gauge of inflation, the core Personal Consumption Expenditures Index, remained at 2.8% in April, while the May core Consumer Price Index stood at 3.4%. The Fed does not expect the core PCE to decline to its 2% goal until 2026. Powell also continued to say that the risks to achieving its dual mandate of price stability and maximum employment have kept “moving into better balance.”

Finally, the Fed stressed that it would continue to be highly data-dependent in its monetary policy decisions and that economic activity has continued to expand at a solid pace, inflation has eased but remains elevated, and that job gains remain strong.