U.S. Federal Reserve holds rates. Here’s what officials said about future cuts

Click to play video: 'U.S. Fed says it won’t cut rates until it has ‘greater confidence’ on inflation'
U.S. Fed says it won’t cut rates until it has ‘greater confidence’ on inflation
The Federal Reserve on Wednesday emphasized that inflation has remained stubbornly high in recent months and said it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its two per cent target. “In recent months,” Chair Jerome Powell said at a news conference, “inflation has shown a lack of further progress toward our 2% objective.” – May 1, 2024

Federal Reserve officials said Wednesday that inflation has fallen further toward their target level in recent months but signaled that they expect to cut their benchmark interest rate just once this year.

The policymakers’ forecast for one rate cut was down from a previous forecast of three, because inflation, despite having cooled in the past two months, remains persistently elevated.

In a statement issued after its two-day meeting, the Fed said the economy is growing at a solid pace, while hiring has “remained strong.” The officials also noted that in recent months there has been “modest” further progress toward their two per cent inflation target. That is a more positive assessment than after the Fed’s previous meeting May 1, when the officials had noted a lack of progress.

Still, the central bank made clear Wednesday that further improvement is needed.

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“We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward two per cent,” Chair Jerome Powell said at a news conference after the Fed meeting ended.

Click to play video: 'Former Bank of Canada special advisor breaks down latest interest rate decision'
Former Bank of Canada special advisor breaks down latest interest rate decision

The policymakers, as expected, kept their key rate unchanged at roughly 5.3 per cent. The benchmark rate has remained at that level since July of last year, after the Fed raised it 11 times to try to slow borrowing and spending and cool inflation. Fed rate cuts would, over time, lighten loan costs for consumers, who have faced punishingly high rates for mortgages, auto loans, credit cards and other forms of borrowing.

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The officials’ rate-cut forecast reflects the individual estimates of 19 policymakers. The Fed said eight of the officials projected two rate cuts. Seven projected one cut. Four of the policymakers envisioned no cuts at all this year.

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“What everyone agrees on,” Powell said at his news conference, is that the Fed’s timetable for rate cuts is “going to be data-dependent.”

The Fed’s latest projections are by no means fixed in time. The policymakers frequently revise their plans for rate cuts — or hikes — depending on how economic growth and inflation evolve over time.

On Wednesday morning, the government reported that inflation eased in May for a second straight month, a hopeful sign that an acceleration of prices that occurred early this year may have passed. Consumer prices excluding volatile food and energy costs — the closely watched “core” index — rose just 0.2% from April, the smallest rise since October. Measured from a year earlier, core prices climbed 3.4%, the mildest pace in three years.

“We welcome today’s reading and hope for more like that,” Powell said.

Though inflation has tumbled from a peak of 9.1 per cent two years ago, it remains too high for the Fed’s liking. The policymakers now face the delicate task of keeping rates high enough to slow spending and defeat high inflation without derailing the economy.

The central bank’s rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low four per cent, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.

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Inflation had cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing,” whereby it would manage to conquer inflation through rate hikes without causing a recession. But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperiling a soft landing.

Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “several more months of good inflation data” before he would consider supporting rate cuts. Though Waller didn’t spell out what would constitute good data, economists think it would have to be core inflation of 0.2 per cent or less each month.

Click to play video: 'Small rate cut not enough to get most Canadians off housing market sidelines'
Small rate cut not enough to get most Canadians off housing market sidelines

As part of the updated quarterly forecasts the Fed’s policymakers issued Wednesday, they 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. And they project 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.

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The expectation that the unemployment rate will remain around those low levels indicates that the Fed thinks that while the job market will gradually slow, it will remain healthy.

“By so many measures,” Powell said at his news conference, “the labor market was kind of overheated two years ago, and we’ve seen it move back into much better balance between supply and demand.”

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