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The Fed left interest rates at 5.25%-5.50%, the highest since 2001, as per previous expectations, and indicates a slower tightening compared to March. The official statement issued after the meeting reports only a minimal change compared to that of May: the progress in recent months on the inflation front, which was missing in the previous version, is now indicated as “modest”.
A cut (or maybe two) by the end of the year
The weight of the inflation data, which has raised its head slightly, raising fears of a very bumpy return to the target, has changed the entire scenario of the rate normalization maneuver. Only one cut is expected for 2024: the median of the “dot s” – the graphs with which each governor indicates his forecasts on future monetary policy – aims at 5.0-5.25% and no longer at 4.5 -4.75% in March. Eight governors, out of nineteen, however, indicated a lower value, 4.75%-5%, corresponding to a second cut, while only seven indicated a single cut. Four would leave rates unchanged until December. Decisions will continue to be made “meeting after meeting”, based on data.
«We need more data to be confident»
“Inflation data at the beginning of this year was higher than expected, even if the most recent ones have fallen a bit,” Chairman Jerome Powell said at a press conference. «We need to see more positive data to strengthen our confidence that inflation is moving sustainably towards 2%. We know that reducing monetary policy tightening too much or too soon or too much could result in a reversal of the progress we have seen in inflation. At the same time, reducing restrictions too late or too little could excessively weaken economic activity and employment.” The key remains the labor market: «We obviously observe the labor market and the economy as a whole, but the labor market very carefully» and «we see a gradual cooling, a gradual movement towards a better balance»: « Wages – he then added – are still moving at a rate higher than the sustainable one, which would be that of the inflation trend and that of the productivity trend”.
The final goal has been revised upwards
At the end of next year, consequently, rates could fall to 4-4.25% – corresponding to four cuts of 25 basis points – and no longer to 3.75-3.50% (equal to five cuts) . In 2026, the median aims for 3-3.25%, with a reduction of another point, as in March: a level that can however be reached with four cuts and not just three.
However, the final goal has also changed: the long-term rate, which can be considered as an implicit objective, has risen again to 2.75%, from 2.50-275% in March and from 2.50% in December. A sign that some governors believe the very characteristics of the US economy have changed, probably in relation to the performance of the labor market. Powell, however, urged us not to give too much importance to these data – which are actually very scattered – because it is difficult to identify which shocks are temporary and which are structural: the increase reflects the overall idea that interest rates may not return to pre-pandemic levels, very low
Inflation revised upwards
The projections indicate inflation – measured by the PCE index – of 2.6% this year (corrected upwards from 2.4% in March), 2.3% in 2025 (from 2.2%) and 2% in 2026. Core inflation, similarly, is indicated at 2.8% this year (from 2.6%), 2.3% next year (from 2.2%) and 2% in 2026. These are “very conservative” projections, explained the president: the overall PCE index is already at 2.6%, the core is already at 2.75%. The 2024 GDP is growing by 2.1% and growing by 2% in 2025 and 2026, without changes compared to the March estimates. Unemployment is forecast at 4% in 2024, 4.2% in 2026 (from 4.1%), and 4.1% in 2026 (from 4%).
