–Fed Officials Project Single 25 BP Rate Cuts in 2024
–Powell Calls CPI ‘Encouraging,’ But Wants More Data To Gain ‘Confidence’
By Steven K. Beckner
(MaceNews) – The Federal Reserve’s policy making Federal Open Market Committee again held the federal funds rate steady Wednesday and gave no indication it will be cutting that key money market rate in the near future.
FOMC participants did anticipate lower rates later this year, but they projected two fewer 2024 rate reductions than when they last went through their quarterly forecasting exercise in March, prospectively leaving the funds rate at a median 5.1% at the end of this year — 50 basis points higher than previously anticipated.
As the FOMC left the federal funds rate in a 5.25% to 5.50% target range for a seventh straight meeting, it reiterated it does not expect to lower the policy rate until it becomes more confident that inflation is headed “sustainably” toward the Fed’s 2% target.
Chairman Jerome Powell provided no more hope that monetary easing might be on the horizon in his post-FOMC press conference. Confirming a “higher for longer” interest rate strategy to counter stubbornly high inflation, he repeatedly stressed that he and his Fed colleagues need to become more cert ain that inflation is “sustainably” on a path to 2%.
Powell called Wednesday morning’s May Consumer Price Index report “encouraging” and “a step in the right direction,” but said the FOMC needs to see more such data before it can gain the requisite “confidence” to consider cutting rates.
He said an “unexpected weakening” in the labor market might force the FOMC to “respond” earlier, but told reporters that is “not what we’re seeing” or expecting.
The FOMC left intact a key passage of its policy statement: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
In their quarterly Summary of Economic Projections, FOMC participants projected that the funds rate will end 2024 at a median 5.1%, implying just one 25 basis point cut to a target range of 5.0-5.25%. By contrast, in March they projected three rate cuts to a a median 4.6% (4.50-4.75%). Market participants were hoping for at least six 2024 rate cuts earlier this year.
Next year, the funds rate is projected to fall further to 4.1%, but that is also higher than in March, when officials projected the funds rate would be reduced to 3.9%. In 2026, they projected the funds rate will drop to 3.1% — the same as in March.
The distribution of rate-cut projections in the “dot plot” reveal considerable division among Fed governors and Bank presidents, but not a wide range of projections. While four preferred to keep the funds rate in the current 5.25-5.50% range, seven thought that a single 25 basis point cut would be appropriate, and eight projected 50 basis points of reductions.
Perhaps of greater significance is that, after lifting their estimate of the” longer run” funds rate a tenth to 2.6% in March, the officials raised it another two tenths to 2.8%. The longer run funds rate, often thought of as the “neutral” rate, includes the 2% inflation target plus an estimate of the real equilibrium short-term interest rate. A higher real rate implies a higher neutral rate and in turn a higher nominal funds rate to achieve the Fed’s dual mandate objectives.
The economic forecasts accompanying the rate projections support the FOMC’s cautious approach to monetary easing.
The officials forecast that PCE inflation will end 2024 at 2.6% — two tenths higher than forecast in March. Core PCE inflation is expected to close out the year at 2.8% — up from 2.6%.
Their forecast of 2.1% real GDP growth, though down from last year’s actual 3.1%, is still three-tenths above the longer run estimate of 1.8%. The unemployment rate is forecast to be 4.0%, the same as in March.
The FOMC policy statement’s main thrust was not changed from the May 1 one, but instead of saying there had been “a lack of further progress’ toward 2% inflation, the new statement cites “modest further progress.”
Powell repeatedly echoed the policy statement’s quest for greater “confidence” that inflation is headed to 2%, despite Wednesday morning’s inflation report. The Labor Department’s CPI showed some improvement in May, but inflation remained well above target. Thanks to a sizable drop in gas prices, the overall CPI was flat, but was still up 3.3% from a year earlier. The core CPI, excluding food and energy, rose 0.2% and 3.4% year over year, as housing prices continued to surge.
That came on the heels of a stronger than expected May employment report. Contrary to the recent narrative that economic growth is slowing and labor market conditions softening, the Labor Department reported that non-farm payrolls grew a surprising 272,000. Average hourly earnings grew 0.4%, twice as fast as in April, leaving wages up a worse-than-expected 4.1% from a year earlier. The unemployment rate unexpectedly ticked up from 3.9% to 4%.
Powell said the CPI report did figure in the FOMC’s discussion and said they also got a sneak peak at the May producer price index data to be released Thursday. And he said FOMC participants had the opportunity to change their “dots” had they wanted to, but indicated that few if any had.
The Fed chief referred favorably to the CPI on several occasions, but made clear it fell well short of justifying monetary easing.
“So far this year, the data have not given us that greater confidence,” he said in his opening statement. “ The most recent inflation readings have been more favorable than earlier in the year however and there has been modest further progress toward our inflation objective. We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.”
Elaborating on the CPI report, Powell said, “We’re looking for something that gives us confidence that inflation is moving sustainably down to 2% and readings like today’s, that’s a step in the right direction, but, you know, one reading isn’t — it’s just only one reading. You don’t want to be too motivated by any single data point.”
Going further, he said, “I would say that today’s inflation report is encouraging, but it comes after several reports that were not so encouraging.”
As he has many times before, Powell said the Fed is aware of both the risk of waiting too long to lower rates, thereby hurting the economy, and lowering them too soon, thereby reversing the progress made in reducing inflation from its 9.1% peak.
With the economy and labor markets now strong and with GDP growth projected to continue at an above-potential 2%, he suggested the Fed can afford to take its time and wait for better inflation data before easing.
“It’s a consequential decision for the economy, (and) you know, you want to get it right,” he said, “and fortunately we have a strong economy, we have the ability to approach this question carefully and we will approach it carefully, while we’re very much keeping an eye on, you know, downside comes risks should they emerge.”
Powell clearly took comfort in the continued strength of the labor market. Although there have been signs of softening, he said, “we’re looking at what is still a very strong labor market but not the super-heated labor market of two years ago, or even one year ago.”
He indicated he is still not comfortable with the rate of wage increases. “We haven’t thought of wages as being the principal cause of inflation, but at the same time, getting back to 2% inflation is likely to require …. a return to a more sustainable level, which is somewhat below the current level of increases in the aggregate.”
A number of Fed officials have questioned whether monetary policy is “sufficiently restrictive” to bring down inflation to target. Powell held to his view that policy is currently “restrictive,” but left room for doubt: “The question of whether it’s sufficiently restrictive is going to be one we know over time. But I think for the reasons I talked about at the last press conference and other places, I think the evidence is pretty clear that policy is restrictive and is having, you know, the effects that we would hope for.”
Powell said the FOMC would raise rates if necessary, but said that’s unlikely.
“That’s always been the thought that since we raised rates this far, we’ve always been pointing to cuts at a certain point,” he said. “Not to eliminate the possibility of hikes. But, you know, no one has that as their base case.”
Overall, Powell seemed content, not to say complacent, about the economy, and he suggested there is no urgency to change the Fed’s monetary stance.
“Ultimately, we think rates will have to come down to continue to support that (a “soft landing),” he said. “But so far, they haven’t had to. And that’s why we’re watching so carefully for signs of weakness, we don’t really see that. “
“We kind of see what we wanted to see, which was gradual cooling in demand, gradual rebalancing in the labor market while we continue to make progress on inflation,” he continued. “We’re getting good results here.”
After announcing plans on May 1 to start scaling back its “quantitatve tightening” policy of reducing the allowed run-off of maturing securities in the Fed’s bond portfolio, the FOMC reaffirmed that strategy Wednesday. Last month the FOMC announced it was reducing the “cap” for Treasury run-offs. It authorized the New York Fed to roll over at auction the amount of principal payments from the Fed’s holdings that exceeds a cap of $25 billion per month – down from $60 billion.
The FOMC left unchanged the amount of MBS reinvestments at $35 billion per month, but said it will reinvest any principal payments in excess of this cap into Treasury securities.
Powell did not elaborate on the balance sheet.
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