Fed Holds Rates at 5.25-5.5% for 7th Consecutive Time
Year-End Rate Cut Forecasts Reduced from 3 to 1
Powell: "Inflation Progressing but More Data Needed"
"2 Rate Cuts Also Plausible"... More Dovish Than Dot Plot
Wall Street: "Powell Signals 1.5 Cuts"... 2 Rate Cut Forecasts Also Expected
The U.S. central bank, the Federal Reserve (Fed), has kept its benchmark interest rate unchanged for the seventh consecutive time and signaled one rate cut this year. This marks a significant retreat from the previous forecast of three cuts. Despite the hawkish (preference for monetary tightening) rate outlook, the slowdown in the May Consumer Price Index (CPI) inflation rate and Fed Chair Jerome Powell not completely ruling out further easing led the S&P 500 and Nasdaq indices to reach record highs. Wall Street analysts suggest that the possibility of two rate cuts within the year still remains alive.
Fed Holds Benchmark Rate Steady for 7th Time... Rate Cut Forecasts Reduced from 3 to 1 This Year
On the 12th (local time), following the Federal Open Market Committee (FOMC) regular meeting, the Fed announced in its policy statement that it would unanimously keep the federal funds rate at 5.25-5.5%. This marks the seventh consecutive hold since last September, maintaining a 2 percentage point gap at the upper bound compared to South Korea.
As the rate hold was expected, the key focus of this FOMC was the dot plot showing members' rate projections. Through the dot plot, the Fed raised its year-end rate forecast from 4.6% to 5.1%. The March dot plot had initially predicted three 0.25 percentage point rate cuts within the year, but this time it suggested only one 0.25 percentage point cut. Among the 19 FOMC members, 7 expected one cut this year, 4 expected no cuts, and 8 anticipated two cuts. The 2025 rate forecast was raised from 3.9% to 4.1%, while the 2026 forecast remained at 3.1%. The medium- to long-term rate forecast was increased from 2.6% to 2.8%.
With an upward revision of this year's inflation forecast, the expected number of rate cuts within the year decreased. In the Summary of Economic Projections (SEP) update, the Fed raised the forecast for this year's core Personal Consumption Expenditures (PCE) price index inflation by 0.2 percentage points to 2.8%. It expects inflation to slow to 2.3% in 2025 and 2% in 2026. The GDP growth forecast for this year remains at 2.1%, and the unemployment rate forecast stays at 4%.
In the policy statement, the Fed explained, "Recent indicators suggest economic activity is expanding at a solid pace," and added, "It is not appropriate to reduce the target range until there is greater confidence that inflation is moving toward 2%." However, the statement included the phrase that there has been "modest further progress" on inflation, an improvement from the May assessment which noted a "lack" of progress.
Powell More 'Dovish' than Dot Plot: "Progress on Inflation but More Data Needed"
At the press conference following the FOMC, Chair Powell reaffirmed a cautious stance, stating that additional confidence in the slowdown of inflation is necessary before cutting rates. He said, "There was progress in the May CPI report, but it is not sufficient to ease policy," and added, "We need more good data to cut rates. We must wait for greater confidence that inflation is slowing toward the 2% target before lowering rates." According to the May CPI report released that morning, the CPI and core CPI rose 3.3% and 3.4% year-over-year, respectively, both below market expectations (3.4% and 3.5%) and the previous month's figures (3.4% and 3.6%).
However, Powell also left open the possibility of a more accommodative monetary policy than the dot plot suggests. He explained, "Both forecasts of one or two rate cuts this year are plausible," and said, "If the labor market weakens unexpectedly or inflation slows faster than expected, we are prepared to respond accordingly with monetary policy." Although the dot plot signals one rate cut this year, it can be interpreted as leaving room for more cuts depending on circumstances.
He assessed that the labor market, which had fueled inflation, is gradually cooling. Citing job creation, quit rates, and increased labor supply, he said, "Labor market conditions have generally returned to pre-pandemic levels," and evaluated that "the labor market is gradually cooling, and demand and supply are gradually rebalancing."
Relief over Inflation Slowdown... S&P 500 and Nasdaq Hit Record Highs
The market was relieved that despite the Fed lowering its rate cut forecast from three to one this year, there was progress on inflation. On the New York Stock Exchange (NYSE) that day, the S&P 500 closed up 0.85% at 5421.03, and the Nasdaq rose 1.53% to 17,608.44, both reaching all-time highs. The Dow Jones Industrial Average closed slightly down by 0.09% at 38,712.21. The slowdown in May CPI inflation and Powell's positive assessment of the May CPI eased concerns stemming from the hawkish rate outlook.
Wall Street interpreted Powell's press conference as more dovish than the dot plot, suggesting that the possibility of two rate cuts this year remains alive. Krishna Guha, Vice Chairman of Evercore ISI, a Wall Street investment advisory firm, said, "Powell's press conference fine-tuned the rate cut forecast to 1.5 cuts," and added, "We still view two cuts as the baseline." Quincy Crosby, Chief Global Strategist at LPL Financial, analyzed, "The data-dependent Fed is demanding cooler inflation reports before embarking on a rate easing cycle," and suggested that the hawkish dot plot likely "did not want to unnecessarily ease financial conditions."
Attention is also focused on the timing of the Fed's rate cuts. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on that day priced in about a 60% chance of a rate cut of at least 0.25 percentage points at the September FOMC, down from 70% earlier that morning. The probability of a cut in November stands at 74%. Some speculate that the Fed may initiate a rate cut at the September FOMC, the last meeting before the November presidential election.
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