WASHINGTON (AP) – 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 key interest rate only once this year.
Policymakers’ forecast for one rate cut was down from an earlier forecast of three because inflation, despite cooling in the past two months, remains persistently elevated.
In a statement released after its two-day meeting, the Fed said the economy was growing at a solid pace, while employment “remained strong.” Officials also noted that there had been “modest” further progress towards their 2% inflation target in recent months. This is a more positive assessment than after the Fed’s previous meeting on May 1, when officials noted a lack of progress.
However, the central bank made clear on Wednesday that further improvement is needed.
“We will need to see more good data to strengthen our belief that inflation is moving steadily toward 2%,” Chairman Jerome Powell said at a press conference after the Fed meeting ended.
Policymakers, as expected, kept their base rate unchanged at around 5.3%. The key rate has remained at that level since July last year, after the Fed raised it 11 times in an effort to slow borrowing and spending and reduce inflation. The Fed’s rate cuts would, over time, ease borrowing costs for consumers who have faced punishingly high rates on mortgages, car loans, credit cards and other forms of borrowing.
Officials’ forecast for the rate cut reflects the individual estimates of 19 policymakers. The Fed said eight of the officials forecast two rate cuts. Seven designed a cut. Four of the policymakers predicted no cuts at all this year.
“What everyone agrees on,” Powell said at his press conference, is that the Fed’s timetable for rate cuts “will be data-driven.”
The Fed’s latest projections are by no means fixed in time. Policymakers often revise their plans for rate cuts — or increases — depending on how economic growth and inflation evolve over time.
On Wednesday morning, the government reported this inflation moderated in May for the second month in a row, a hopeful sign that an acceleration in prices that occurred earlier 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 increase since October. Measured from a year ago, core prices rose 3.4%, the softest pace in three years.
“We welcome today’s reading and hope for more like this,” Powell said.
Stock prices jumped and bond yields fell Wednesday morning after the government reported softer-than-expected inflation data — and didn’t budge much even as Fed policymakers forecast fewer rate cuts for the year 2024 than the market expected.
Although inflation has fallen from a peak of 9.1% two years ago, it remains too high for the Fed’s liking. Policymakers now face the delicate task of keeping rates high enough to slow spending and beat high inflation without wrecking the economy.
The central bank’s rate policies over the next few months may also have consequences for the presidential race. Although the unemployment rate is low at 4%, employment is strong and consumers continue to spend, voters have generally received a sour view of the economy under President Joe Biden. In large part, this is because prices remain much higher than they were before the pandemic hit. High borrowing rates impose a further financial burden.
Inflation had cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing,” where it would be able to tame inflation by raising rates without triggering a recession. But inflation came unexpectedly high in the first three months of this yeardelaying the Fed’s hoped-for rate cuts and potentially risking a soft tapering.
Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “a few more months of good inflation data” before he would consider supporting rate cuts. Although Waller did not explain what would constitute good data, economists think it would have to be core inflation of 0.2% or less each month.
Asked at his press conference about the eventual need for rate cuts, Powell said: “We think that ultimately if you put policy (interest rates) at a restrictive level, eventually you will see a real weakening in the economy .”
Although the economy has managed to keep growing despite the high rates the central bank has set, the Fed chairman said that “ultimately, we think rates will have to come down to continue to support it. So far, they haven’t had to.”
As part of updated quarterly forecasts that policymakers released on Wednesday, they predicted the economy would grow by 2.1% this year and 2% in 2025, the same as they had forecast in March. They expect core inflation to be 2.8% at the end of the year, according to their preferred gauge, down from a previous forecast of 2.6%. And they predict that unemployment will remain at the current level of 4% until the end of this year and will reach 4.2% by the end of 2025.
The expectation that the unemployment rate will remain around those low levels indicates that officials believe that while the labor market will gradually slow, it will remain fundamentally healthy.
“By so many measures,” Powell said, “the labor market overheated two years ago, and we’ve seen it return to a much better balance between supply and demand.”
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AP Business Writer Alex Veiga contributed to this report from Los Angeles.