When the year started and with inflation cooling off, economists were optimistic the Federal Reserve would cut interest rates several times this year.
Now, even though Fed officials recognize the inflation rate has tumbled much closer to their 2% goal, they’re signalling they’ll likely only make one cut the rest of the year.
In a statement issued after its recent two-day meeting, the Fed said the economy is growing at a solid pace, while hiring has “remained strong.” Officials also noted that in recent months there has been “modest further progress” toward its 2% inflation target.
That’s the Fed being more upbeat about it than they were after their May 1 meeting.
This time, as was expected, the Fed kept the key rate unchanged at roughly 5.3%, where it’s been since July 2023. That was after the Fed raised it 11 times since March 2022 in an effort to slow borrowing and spending and cool inflation.
The officials’ rate-cut forecast reflects the individual estimates of 19 policymakers, according to an Associated Press report. The Fed said that eight of those officials projected two rate cuts and seven projected one cut. Four said they envisioned no cuts at all this year, the AP reported.
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.
In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate. Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought.
As part of the updated quarterly forecasts the Fed’s policymakers issued Wednesday, they projected that the economy will grow 2.1% this year and 2% in 2025, the same as they had envisioned in March. They expect core inflation to be 2.8% by year’s end, according to their preferred gauge, up from a previous forecast of 2.6%. And they project that unemployment will stay at its current 4% rate by the end of this year and edge up to 4.2% by the end of 2025.
