US Fed holds interest rates, now sees just one cut in 2024

The US Federal Reserve left its key lending rate unchanged on Wednesday and penciled in just one rate cut this year, down from the three expected in March after inflation stalled in the first quarter.

The Fed voted unanimously to keep its benchmark interest rate between 5.25 and 5.50 percent, and said that "modest" progress had been made toward its long-term inflation target of two percent.

The announcement suggests that central bank officials remain wary about cutting rates too soon, despite consumer inflation data published earlier Wednesday, which pointed to a slowdown in the rate of price increases in May.

The annual consumer price index (CPI) came in at 3.3% last month, down 0.1 percentage point from April and unchanged on a monthly basis, the Labor Department said. This was slightly below expectations.

Fed chair Jerome Powell welcomed the inflation data during a press conference on Wednesday, but added that the US central bank needs to see more "good inflation readings" before it gains sufficient confidence to consider cutting interest rates.

He added that if the US economy remains strong and inflation persists, the Fed would be "prepared to maintain the current target range for the federal funds rate as long as appropriate."

Just one rate cut
The surprise of the day came in the Fed's updated economic forecasts from the 19 members of its rate-setting Federal Open Market Committee (FOMC).

Policymakers lowered their individual forecasts for the number of rate cuts they expect this year, reducing the median projection for the end of 2024 to the midpoint between 5.00 and 5.25 percent.

This means that FOMC participants only expect one 0.25 percentage point cut before year-end, two fewer than in the last update in March.

The announcement caught some analysts by surprise, while others suggested the Fed would have to backtrack in the months ahead.

"The dropping of two of the easings previously expected this year is unnecessarily aggressive," Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a note to clients.

He added that the Fed would likely need to backtrack to a softening of the labor market of the summer and better progress on inflation.

"It will be a close call between one or two 25 bps (basis point) rate cuts this year," Wells Fargo economists wrote in an investor note, adding that their forecast remained for two cuts this year.

FOMC participants penciled in a median of four quarter percentage-point cuts for next year, and an additional four in 2026.

In their economic forecasts, Fed officials also raised the forecast for headline inflation this year to 2.6%, up 0.2 percentage points, and kept their growth outlook unchanged at 2.1%.

Policymakers then expect both growth and inflation to moderate further in 2025.

September slips away 
The better-than-expected inflation data earlier Wednesday led futures traders to raise their expectations of an interest rate cut by mid-September to more than 70%, up sharply from around 50 percent on Tuesday, according to CME Group data.

But the Fed's rate decision tempered the optimism slightly, with traders dialing back their expectations to just over 60 percent.

"The Fed is not likely to have enough confidence that the economy is cooling to cut rates by September," KPMG chief economist Diane Swonk wrote in a blog post after the Fed's rate decision, adding that KPMG still expects one cut in December.

"Inflation just seems like it's really sticky, and it's putting up quite a fight," Allianz Trade Americas senior economist Dan North told AFP, adding that the Fed "always waits too long" before starting to cut rates.

"We expect a string of more favorable inflation releases -- on the heels of Wednesday's softer-than-expected May CPI report -- will clear the way for the Fed to lower rates in September," Oxford Economics lead US economist Nancy Vanden Houten wrote in a note to clients.