(Reuters) -The Federal Reserve held interest rates steady on Wednesday and pushed out the start of rate cuts to perhaps as late as December, with officials projecting only a single quarter-percentage-point reduction for the year amid rising estimates for what it will take to keep inflation in check.
The markdown in the outlook for rate cuts, from three quarter-percentage-point reductions seen in the Fed’s March projections, was made despite the central bank’s acknowledgement in its new policy statement of “modest further progress” towards its 2% inflation target – an upgrade from its May 1 statement.
It coincided with an increase to 2.8% in the estimated long-run, or “neutral,” rate of interest, from 2.6%, which indicates policymakers have concluded the economy needs more restraint in order to finish the battle against rising prices.
STORY STATEMENT SUMMARY OF ECONOMIC PROJECTIONS
MARKET REACTION:
STOCKS: The S&P 500 held a strong gain and was up 1.06%
BONDS: The yield on benchmark U.S. 10-year notes ticked higher but was still down sharply on the day at 4.277%. Likewise, the 2-year note yield was still down sharply at 4.72%
FOREX: The dollar index was still off 0.722% with the euro up 0.82%
COMMENTS:
NATE THOOFT, CHIEF INVESTMENT OFFICER AND SENIOR PORTFOLIO MANAGER, MULTI-ASSET SOLUTIONS TEAM, MANULIFE INVESTMENT MANAGEMENT, BOSTON (emailed)
“The biggest takeaway of the meeting surrounded the change in the dot-plot moving from three 25bps cuts to one for the remainder of 2024. While one is the median projection it was a close a call on votes between 1 or 2 in 2024. And 2025 saw a median increase to four cuts from three previously. The net impact to the next 18 months being a reduction of one less 25bps cut.
“Modest adjustments to raise both inflation estimates, and unemployment rate projections were also notable and necessary modifications to support the reduction of cuts projected in the dot-plot.”
MIKE WILSON, CHIEF INVESTMENT OFFICER, MORGAN STANLEY, NEW YORK (on Reuters Global Markets Forum)
“(Fed) generally in line. Maybe a bit disappointment relative to CPI release which they didn’t have before dots were constructed.
“I think we are on a downward trajectory at this point given the lag with M2 growth … it’s well defined now. However, I think they may be surprised on the growth front where data has been weaker this year.”
GREG MCBRIDE, CHIEF FINANCIAL ANALYST, BANKRATE (emailed)
“The May CPI released Wednesday morning is the type of inflation report we need to see more of in the months to come. The only hint of acknowledgement in the Fed statement was the note of ‘modest’ progress – rather than a ‘lack of’ noted in March – toward the 2 percent inflation objective.”
GENE GOLDMAN, CHIEF INVESTMENT OFFICER, CETERA INVESTMENT MANAGEMENT, LOS ANGELES, CA
“The Fed is acting like a CEO sandbagging rate cut expectations down to one or two cut, but likely going to beat them later this year with two or more. The reason is that inflation is rolling over pretty quickly. “
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
“The policy statement was mildly more dovish than the previous one. Today’s decent CPI reading helped. The dot plot is probably more important than the policy statement. The Fed shifted from three cuts down to one, but they added a cut to 2025. The net effect is to remove one cut over the next 18 months, which probably won’t matter much to the broader economy. The market cares more than the economy does about whether there are two cuts this year or only one. A difference of a few months or a few basis points won’t affect most people’s lives. The Fed basically is basically rearranging the rate cut deck chairs.
“It stretches credulity to think that we will end 2024 with 4.0% unemployment when we’re already there and we’re half-way through the year.
“The increase in the ‘neutral’ federal funds rate—the longer-run projection—is notable. Instead of thinking cash yields will move below 3%, now maybe people should start planning on cash earning more than 3%. The real yields from cash could be higher than originally thought.”
(Compiled by the Global Finance & Markets Breaking News team)
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