The Federal Reserve stood firm again, leaving its benchmark rate unchanged at its current 23-year high after the Fed’s two-day meeting concluded Wednesday. Meanwhile, the central bank signaled a more tepid approach to rate cuts this year than investors had hoped for.
The Fed’s decision maintains the federal funds benchmark rate in the 5.25%-5.50% range where it has been since July.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated,” the Federal Open Market Committee (FOMC) said in a post-meeting statement. The Fed also said it has made “modest further progress” in bringing down inflation closer to its 2% target. This is a notable departure from previous language describing a “lack of further progress.”
Additionally, the central bank lowered its forecast for rate cuts this year to just one cut, down from three projected in March, according to the FOMC’s Summary of Economic Projections. However, the Fed anticipates making four rate cuts in 2025 and another four in 2026, eventually bringing the median key rate down to 3.1% by the end of 2026.
Fed policymakers hinted that they expect inflation to run hotter this year. The Fed’s “dot plot,” which summarizes members’ individual forecasts, shows a more hawkish stance among some policymakers, with four against rate cuts this year, up from two previously.
“With today’s announcement, the Fed confirms its higher-for-longer position on interest rates. But the stance is looking more untenable as more American households continue to pull back on spending,” Dr. Selma Hepp, CoreLogic’s chief economist, said in a statement.
She added: “As more economic indicators begin to confirm this and unemployment begins to rise, the Fed will then look to cut rates. What’s not clear yet is when exactly the disinflation signs will be consistent enough for the first rate cut — we hope it’s still this year.”
Other economists in the housing space hold a similar view.
“The tight job market—highlighted again in May’s employment data—is likely leading many members to continue to be cautious about cutting rates before inflation is consistently lower,” Mike Fratantoni, SVP and chief economist with the Mortgage Bankers Association (MBA), said in a statement.
“Beyond the projections for 2024, the FOMC also moved up its projection for the terminal rate, as we expected. Once it starts, this cutting cycle is likely to be shorter than past cycles,” he added.
Fratantoni noted that today’s decision to leave rates unchanged doesn’t impact the MBA’s mortgage rate forecast calling for rates to drop to about 6.5% by the end of this year.
The committee’s projections indicate inflation may not return to the 2% target until sometime in 2026.
The central bank’s decision to keep the status quo on rates was surprising to many analysts on the heels of better-than-anticipated inflation readings released Wednesday morning.
The Consumer Price Index (CPI) slowed to 3.3% on an annual basis in May, down from 3.4% in April and remained flat over the previous month, according to data from the Bureau of Labor Statistics (BLS).
Shelter costs rose 0.4% for the fourth straight month, hampering progress on inflation elsewhere. The index for food increased 0.1% in May while the eating out costs rose 0.4% month over month. Energy costs dropped 2% from April to May, driven by a 3.6% decline in gas prices.
The overall index for consumer prices (excluding food and energy) slowed month over month in May, rising 0.2% compared to 0.3% in April, according to BLS data.
