The Fed expects to cut rates just once this year

Federal Reserve Chairman Jerome Powell is framed by a trader's screens on the floor of the New York Stock Exchange, on Wednesday, June 12.

Stocks ended the day mixed Wednesday as investors parsed a key inflation report and the Federal Reserve’s latest projections for interest rate cuts this year.

The Dow fell 35 points, or 0.1%. The S&P 500 gained 0.9% and the Nasdaq Composite jumped 1.5%, reaching record-high closes for the third consecutive day.

Investors cheered the May Consumer Price Index report, which showed that inflation cooled at a slower pace than expected last month. Consumer prices rose 3.3% from the prior year, a slower clip than April’s 3.4% rate, according to the Bureau of Labor Statistics. On a monthly basis, prices were unchanged, slowing from April’s 0.3% gain.

The Fed on Wednesday afternoon held rates steady as expected, but signaled that it now expects to cut rates just once in 2024 rather than the three times it had previously forecast.

Fed Chair Jerome Powell reiterated at the post-meeting press conference that the central bank will not cut rates until it sees more data showing that inflation is cooling.

As stocks settle after the trading day, levels might change slightly.

Federal Reserve Bank Chair Jerome Powell arrives to annouce that interest rates will remain unchanged during a news conference at the Federal Reserves’ William McChesney Martin building on June 12 in Washington, DC. 

Federal Reserve Chair Jerome Powell said Wednesday’s Consumer Price Index data showing inflation cooled to 3.3% last month from 3.4% in April is “encouraging.”

But Powell isn’t in full celebratory mode.

That’s because the report “comes after several reports that were not so encouraging.” Officials were caught off guard in March when CPI jumped to 3.5% from 3.2% in February, marking the biggest one-month acceleration in half a year. That, along with other inflation data, caused officials to reconsider how many rate cuts would be merited this year.

Powell declined to answer whether the new data pushes up the timetable for a potential rate cut.

“Certainly, more good inflation readings will help with that,” he said in a post-meeting press conference on Wednesday afternoon. But he cautioned that inflation data is just one piece of the puzzle and the decision to cut rates will be based on the “totality” of economic data.

Inflation-beating interest rates are still available to savers and investors looking for very low-risk ways to grow their money. 

People carrying variable-rate debt like credit cards and those seeking a loan won’t be happy given that the Federal Reserve’s benchmark lending rate rate, which directly and indirectly affects consumers’ borrowing costs, remains at a 23-year high.

Those rates will likely stay high for a while, since central bankers’ latest summary of economic projections shows just one rate cut is likely this year. And when that cut does come, it’s likely to be small.

“Absent a complete about-face from the economy, interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers. Utilize zero-percent credit card balance transfer offers, shop around for lower fixed-rate personal loans and home equity loans, and channel as much income as possible toward paying down this debt as quickly as possible,” said Greg McBride, Bankrate.com’s chief financial analyst.

But the Fed’s decision leaves savers, once again, in the catbird seat when it comes to making money on their money.

Read more here.

Federal Reserve officials believe there’s a Goldilocks interest rate out there. One that isn’t so low that it ushers in inflation, yet not so high that it tips the economy into a recession. Officials refer to this as r-star or the “neutral rate of interest.”

In theory, that perfect rate exists in the real world. And it’s likely the missing puzzle piece needed for the Fed to achieve a soft landing, where inflation is tamed but a recession is avoided.

Fed officials now seem to believe the neutral rate is higher in the long run than they anticipated, whereas rates before the pandemic were “very low” historically, Fed Chair Jerome Powell told reporters.

“Ultimately we think that things like the neutral rate are driven by longer run, slow-moving forces,” Powell said on Wednesday. “There’s a really good question about whether those really have changed or whether instead rates and the economy are experiencing a series of persistent but ultimately temporary shocks.”

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, today.

Fed Chair Jerome Powell has been wanting to see the US labor market get into a “better balance” for quite some time now.

It looks like he’s getting his wish. The job market is starting to resemble its pre-pandemic state, the Fed chief said Wednesday.

Reading from his prepared remarks, Powell rattled off a series of employment data: payroll gains averaging 218,000 per month in April and May; unemployment having crept up but remaining low at 4%; job creation driven by increases in participation among prime-aged workers and immigrants; slower wage growth; and a narrower jobs-to-workers ratio.

“Overall, a broad set of indicators suggest that conditions in the labor market have returned to about where they stood on the eve of the pandemic, relatively tight but not overheated,” Powell said.

During his post-meeting press conference, Powell said the Fed continues to keep a close eye on the labor market.

“We see gradual cooling, gradual moving toward a better balance,” he said. “We’re monitoring it carefully for signs of something more than that, but we really don’t see that.”

The New York Stock Exchange is seen on April 29 in New York City. 

Here’s what Wall Street has to say after the Federal Reserve signaled Wednesday that it will cut rates just once in 2024:

Federal Reserve officials are now predicting just one rate cut for the year as opposed to the three cuts they predicted back in March and at the end of last year.

The Fed doesn’t target one specific interest rate. Rather it targets a range of interest rates through what’s known as the federal funds rate, which in turn influences the interest rates we pay on all kinds of debt.

Currently, the Fed is targeting a range between 5.25-5.5%, the highest level in 23 years. A 25-point cut would lower the target range to between 5-5.25%.

At the height of the pandemic, the Fed targeted a range between 0-0.25%, the lowest it had been since the Great Recession. It wasn’t until March 2022 that Fed officials voted to raise the target range to 0.25-0.5%. By the end of 2022, the range was between 4.25-4.5% after officials authorized a series of steep hikes to rein in inflation.

Wall Street’s best bet for the first rate cut is currently September, according to futures, and those odds improved markedly after the release of the May CPI. For that to happen, however, inflation will have to continue to drift lower in the coming months.

Officials frequently emphasize that they are “data dependent” and make conclusions about the economy after data stretching over several months reveal a trend. It’s unclear if the factors that resulted in hotter-than-expected inflation readings earlier this year are still lurking in the background, but the May CPI provided some relief.

Federal Reserve Chair Jerome Powell will likely field questions about rate cut timing in his post-meeting press conference, scheduled for 2:30 pm ET.

Traders work on the floor at the New York Stock Exchange today.

The Dow inched lower on Wednesday after the Federal Reserve held interest rates on hold and signaled it expects one rate cut in 2024.

The Dow fell 14 points, or 0.04%. The S&P 500 gained 0.8% and the Nasdaq Composite added 1.6%.

The Fed previously forecasted three quarter-point rate cuts this year. But signs of sticky inflation and a still-hot labor market have put those cuts on the backburner.

Still, investors were cheered on Wednesday by a cooler-than-expected May Consumer Price Index report, which showed that inflation slowed more than expected last month.

An exterior view of the Marriner S. Eccles Federal Reserve building, on January 21, 2024, in Washington.

The Federal Reserve said Wednesday it is keeping its benchmark lending rates at their current levels for the seventh time in a row, while signaling fewer rate cuts than previously estimated.

That means borrowing costs on everything from car loans to mortgages will remain elevated.

The Fed has kept interest rates at a 23-year high for nearly a year, after kicking off an aggressive rate-hiking campaign in March 2022.

Central bankers are waiting for more evidence that inflation is headed toward 2% — but the economy’s resilience is keeping them on hold.

Federal Reserve officials are anticipating a higher inflation rate this year, 2.6% measured by the Personal Consumption Expenditures price index, compared to the 2.4% prediction they made in March. That’s according to new projections the central bank released Wednesday afternoon.

As of April, PCE inflation is at 2.7%. The Fed targets 2% annual inflation, which officials don’t see the central bank achieving until 2026.

They also expect the inflation rate excluding volatile components like food and energy — also known as “core inflation” — to be 2.8% this year, which is higher than the levels they predicted in March.

Officials don’t think the unemployment rate will move above its current level of 4% for the remainder of the year, a prediction they made back in March as well.

Federal Reserve officials meet just four more times this year — in July, September, November and December. So the single rate cut officials are now penciling in for the year could hypothetically come at either of those meetings.

But Fed officials including Chair Jerome Powell have repeatedly said they need to see more “good” inflation data indicating inflation is on a sustainable path to the Fed’s 2% goal before they can consider cutting interest rates.

There’s a decent chance they’ll get that reassurance in November. There’s just one little issue: Their decision would be announced two days after Election Day.

Optically, it could seem as though the central bank was waiting until after the election to cut so as not to boost President Joe Biden’s chances of getting reelected since rate cuts generally tend to have a positive impact on stocks and make it cheaper to get loans.

But as an independent body, the Fed makes all of its decisions regardless of politics and has no ulterior motive in terms of helping one candidate’s odds of getting elected.

Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, looks on at Teton National Park where financial leaders from around the world gathered for the Jackson Hole Economic Symposium outside Jackson, Wyoming, on August 26, 2022.

Cleveland Federal Reserve President Loretta Mester is set to cast her last vote on monetary policy decisions at Wednesday’s meeting.

Mester, who became president of the Cleveland Fed a decade ago, will be retiring at the end of this month. Beth Hammack was recently named as Mester’s successor. However, she will not assume the role until August 21. For the July meeting of the Federal Open Market Committee, Chicago Fed President Austan Goolsbee will be voting in place of the Cleveland Fed.

At every Fed meeting, 12 Fed officials vote, seven of whom are from the Fed’s board of governors. Aside from New York Fed President John Williams, the remaining votes are from an annually rotating panel of regional Fed presidents. Goolsbee is currently an alternate voter and otherwise would not have voted until 2025.

A screen displays a news conference with Federal Reserve Chairman Jerome Powell as traders work on the floor at the New York Stock Exchange on May 1.

After getting its preferred inflation gauge down from over 7% in June 2022 — its highest level since the early 1980s — to its current reading of 2.7%, you’d think central bankers would be breathing a sigh of relief.

And yet, Federal Reserve officials are likely doing anything but that at their June two-day monetary policy meeting, which kicked off on Tuesday.

Officials are all but certain to leave rates unchanged regardless of the better-than-expected May Consumer Price Index report.

“Of course we’re not satisfied with 3% inflation,” Fed Chair Jerome Powell told reporters after last month’s policy meeting, adding that “3% can’t be in a sentence with satisfied.”

Powell and his colleagues at the Fed will not budge on 2%. And until they’re convinced inflation is on a sustainable path to that level, rate cuts won’t be on the table.

The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022 in Washington, DC. 

The Federal Reserve’s quarterly Summary of Economic Projections includes a chart that is colloquially known as the dot plot, which shows where each of the central bank’s 19 officials expect interest rates to go in the future.

If the Fed has shifted its thinking about when to lower interest rates, it will come through in this chart.

Investors pay close attention to these forecasts for information about the path of rate hikes. When there’s a shift in the plot, it tells investors that the Fed could plan a change in how they’re approaching rates.

The official policy statement from the Federal Reserve represents a consensus among the voting policy members, but this extra data allows investors to look under the hood and see what’s going on behind the scenes.

The plot can also underscore the difference between what investors think will happen and what the Fed thinks will happen. So if the Fed projects fewer rate hikes ahead, that will likely send bond yields higher and markets lower.

Economists are widely expecting the latest SEP to show officials have penciled in one or two rate cuts this year, instead of the three they forecast in March.

The U.S. flag is magnified in Federal Reserve Bank Chair Jerome Powell's glasses as he announces that interest rates will remain unchanged during a news conference at the bank's William McChesney Martin building on May 1 in Washington, DC. 

“There has been little in the way of measurable improvement in inflation since the Fed’s May meeting, so the prospect and timing of any interest rate cut remains unclear,” said Greg McBride, chief financial analyst at Bankrate, in a note this week.

The central bank is set to release its latest economic projections Wednesday, which will likely show an expectation for one rate cut this year, down from the original three signaled in December.

“Absent a complete about-face from the economy, interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers.”

People cross a street in front the headquarters building of the European Central Bank (ECB) in Frankfurt am Main, western Germany, on June 5.

The Bank of Canada and the European Central Bank both cut interest rates last week to lower borrowing costs as inflation recedes following years of rate hikes. Central banks in Switzerland and Sweden have also cut interest rates this year.

It’s a move that should bring some relief to companies and consumers, many of whom have felt the financial strain of the rapid run-up in interest rates since late 2021.

Yet the Federal Reserve is still holding out. Here’s why.

People have lunch at a restaurant at the Moynihan Train Hall on May 11, 2023, in New York City.

Grocery prices stayed flat in May, after ticking down the month before. But menu prices, a source of frustration for budget-conscious consumers, are still going up — even as restaurants brag about their discounted meals.

Menu prices rose 0.4% at sit-down restaurants from April to May, adjusted for seasonal swings, according to inflation data released Wednesday by the Bureau of Labor Statistics. In that time, prices ticked up by 0.2% at limited service spots, which include fast casual and fast food joints.

The difference between grocery increases and menu price inflation was more pronounced for the full year. Grocery prices rose 1% in the 12 months through May. In that period, menu prices at full-service, or sit-down, restaurants rose 3.5%. They jumped 4.5% at limited-service restaurants, which include fast food and fast casual joints.

Those increases, particularly in fast food prices, have caused customers to pull back, eroding the sector’s reputation for affordability.

Restaurant chains raise menu prices every year, but the pace has increased since the pandemic. While higher prices didn’t scare people off at first, customers seem to have had enough, leaving chains to reverse course.

Read more here.

A man puts gas in a truck at a station on June 11 in Chicago, Illinois. 

Inflation appears to be getting back to its slowing ways, but a deep dive through the data shows that some prices are even falling to 2020 levels.

From May to April, prices fell in about half of the spending categories tracked for the CPI, a larger share than the April to March timeframe, Bureau of Labor Statistics data shows.

The biggest declines were seen in “other condiments” (dips, baking powder, chocolate chips, vinegar, etc.), which were down 6.1%; gasoline, down 3.7%; and airline fares, down 3.6%.

Monthly data, even the seasonally adjusted kind, can be volatile, but the trends are showing up in more long-term data. As of May, a couple more categories (women’s outerwear and public transportation) are showing prices are down as compared to February 2020.

And while televisions (down 22.6%), toys (down 6.7%), and airfares (down 4.7%) are among some of the most notable spending areas where things have become cheaper, only 6% of the CPI categories are down from the pre-pandemic benchmark.

Specialist James Denaro works at his post on the floor of the New York Stock Exchange on June 12.

The S&P 500 and Nasdaq Composite indexes both hit record highs Wednesday morning before retreating from those levels, as investors continued parsing the better-than-expected inflation report.

The Dow rose 89 points, or 0.2%, by midday Wednesday. The S&P 500 gained 1.1% and the Nasdaq Composite rose 1.7%.

Wall Street is awaiting the Federal Reserve’s June interest rate decision and latest set of rate projections due at 2 pm ET.