Fed Holds Rates Steady: Projections Show Fewer Rate Cuts, Higher Inflation Outlook

The Federal Reserve decided to keep interest rates unchanged within the 5.25-5.50% range for the seventh consecutive meeting on Wednesday, as widely anticipated by the market.

However, the updated Summary of Economic Projections (SEP) deliver a hawkish surprise for markets, indicating fewer potential rate cuts ahead and slightly higher inflation estimates compared to the previous projections in March.

June Fed Meeting Statement: Key Points

• Interest Rates: The federal funds rate remains steady between 5.25% and 5.50%. The Federal Open Market Committee (FOMC) reiterated that the central bank “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2% target.”
• Economic Activity: The Fed has made a subtle change to the opening paragraph of its statement, noting that “economic activity has continued to expand at a solid pace,” which is a slightly less optimistic assessment compared to the “robust pace” mentioned in the previous May statement.
• Inflation Trend: The Fed states that recently “there has been modest further progress toward the Committee’s 2% inflation objective”
• Quantitative Tightening: There are no changes to the quantitative tightening tapering pace from the updates presented in May. The Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The monthly redemption cap on agency debt and agency mortgage-backed securities will remain at $35 billion, with any principal payments in excess of this cap reinvested into Treasury securities.

June Fed Economic Projections: What You Need To Know

• Fewer rate cuts: The crucial updates are found in the new economic projections for the federal funds rate. The median FOMC member now anticipates one rate cut in 2024, compared to the three indicated in March. Additionally, the federal funds rate is expected to be 4.1% in 2025 (up from 3.9%) and 3.1% in 2026 (unchanged). For the longer term, expectations have risen from 2.6% to 2.8%.
• Inflation outlook: Personal Consumption Expenditure (PCE) inflation has been revised up from 2.4% to 2.6% for 2024, and from 2.2% to 2.3% for 2025. Expectations for 2026 and the longer run are unchanged. Forecasts for core PCE inflation also see an uptick from 2.6% to 2.8% in 2024, and from 2.2% to 2.3% in 2025.
• Growth outlook: The change in the real GDP has been left unchanged.

Markets little moved following the June Fed statement and new projections, with major U.S. indices marginally trimming session gains.

The SPDR S&P 500 ETF Trust SPY was 0.8% higher, while the Invesco QQQ Trust QQQ was 1.3% up for the day.

Traders now await Fed Chair Jerome Powell remarks at 2:30 p.m. ET

Read now: How May’s Inflation Slowdown Could Influence Fed’s Next Move: Insights From 6 Economists

Image generated using artificial intelligence via Midjourney.