Federal Reserve officials announced on Wednesday that inflation has continued to move closer to their target level in recent months, but they now expect to cut their benchmark interest rate just once this year, down from a previous forecast of three cuts.
This change in expectations is likely due to the fact that inflation, despite cooling off in the past two months, remains persistently high.
In a statement released after their two-day meeting, the Fed noted that the economy is growing at a solid pace and hiring has “remained strong.” They also acknowledged that there has been “modest further progress” toward their 2% inflation target in recent months, which is a more positive assessment than their previous meeting in May.
The policymakers kept their key interest rate unchanged at around 5.3%, which has been the case since July of last year, after the Fed raised rates 11 times to slow borrowing, spending, and inflation. If the Fed does cut rates, it would eventually lead to lower borrowing costs for consumers on mortgages, auto loans, credit cards, and other forms of debt.
The Fed’s updated quarterly projections showed that out of the 19 policymakers, eight projected two rate cuts, seven projected one cut, and four envisioned no cuts at all this year. However, these projections are not set in stone and can change depending on how the economy and inflation evolve over time.
On Wednesday morning, the government reported that inflation eased in May for the second straight month, suggesting that the acceleration of prices that occurred earlier this year may have passed. The closely watched “core” index, which excludes volatile food and energy costs, rose just 0.2% from April, the smallest increase since October.
Although inflation has fallen significantly from its peak of 9.1% two years ago, it remains too high for the Fed’s liking. The policymakers now face the challenging task of keeping rates high enough to slow spending and combat inflation without causing a recession.
The Fed’s rate policies over the next several months could also have implications for the presidential race, as voters have generally taken a negative view of the economy under President Joe Biden, largely due to the fact that prices remain much higher than they were before the pandemic.
Inflation had cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing” by managing to conquer inflation through rate hikes without causing a recession. However, inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially jeopardizing a soft landing.
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, noting that it would likely take more time to gain that confidence than Fed officials had previously thought.
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, which economists believe would have to be core inflation of 0.2% or less each month.
The Fed’s policymakers also issued updated quarterly forecasts on Wednesday, projecting 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, up from a previous forecast of 2.6%, and 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.
The Associated Press contributed to this article.