By Chris Dorrell
The US Federal Reserve voted to leave interest rates on hold for the seventh consecutive meeting but surprised markets with projections which showed that policymakers expect to cut interest rates only once in 2024.
The rate decision was widely expected and means that the federal funds rate remains in a range of 5.25-5.50 per cent, a level reached last July.
The Fed said that there has only been “modest further progress” towards the two per cent target, cautioning that inflation “remains elevated”.
Alongside its latest decision, the Fed released its latest set of ‘dot-plot’ projections which showed that policymakers only expect to cut rates once this year, down from three back in March.
This reflected higher inflation forecasts. Rate-setters revised up their median expectation on core personal consumption expenditure (PCE) over the year to 2.8 per cent from 2.6 per cent. Core PCE is the Fed’s preferred gauge of inflation.
The decision came just a few hours after the latest inflation data for May, which showed inflation slightly undershot expectations.
Prices were unchanged in May for the first time since last June, compared to the 0.1 per cent increase expected by economists. This brought the headline rate down to 3.3 per cent.
Core inflation also came in lower than expected, rising just 0.2 per cent on last month. This was the slowest rate of increase since August 2021.
Looking back over this year, however, inflation has remained frustratingly persistent, forcing markets to reassess when the rate cutting cycle will begin. At the turn of the year investors thought the cutting cycle would be well underway but now traders do not expect a cut until September.
Although there are some signs the economy is beginning to weaken under the pressure of the Fed’s rate hikes, it remains too strong to be confident that inflation will remain sustainably at two per cent.
Figures out last week showed that the economy added significantly more jobs than expected in April. The Fed noted that “job gains have remained strong and the unemployment rate has remained low”.
The decision comes a week after the European Central Bank (ECB) voted to cut interest rates for the first time in five years, reflecting the underlying weakness of the European economy. The Bank of England meets next week and is expected to leave rates on hold.
