U.S. FOMC Meeting (June 11-12, 2024)

Fed holds rates, signals fewer cuts in 2024

• The Federal Reserve Open Market Committee (FOMC) maintained the federal funds rate in the 5.25% to 5.50% range and announced it would continue its balance sheet runoff. 
• The Fed kept its language on the strength in economic data, stating "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."
• With inflation having improved in the last two months, the one change in the statement was acknowledging that "there has been modest further progress toward the Committee's 2 percent inflation objective."
• On the future path of policy, the statement repeated that "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."
• The Fed's Summary of Economic Projections was updated from March:
  
  • The median projection for real GDP growth was maintained at 2.1% in 2024, 2.0% in 2025, 2.0% in 2026, and 1.8% over the long run. 
  • The median unemployment rate forecast was increased one tenth in 2025 and over the long run, with 4.0% in 2024, 4.2% in 2025, 4.1% in 2026, and 4.2% over the long run.
  • On inflation, the median estimate for core PCE was raised to 2.8% in 2024, 2.3% in 2025, and 2.0% in 2026 (from 2.6%, 2.2%, and 2.0%).
  • The median projection for the fed funds rate was revised up by 50 basis points this year and 20 basis points over the longer run. The fed funds rate is projected to be 5.1% in 2024, 4.1% in 2025, 3.1% in 2026, and the long-run neutral rate was assumed to be 2.8% (from 4.6%, 3.9%, 3.1%, and 2.6%).
• All of the members of the FOMC voted in favor of the decision.

Key Implications

• The Fed is still planning to cut rates in 2024. While the median Fed dot only points to 25 basis points in cuts this year (vs 75 bps in March), investors were concerned whether the Fed was still prepared to cut at all. The upturn in inflation over the first few months of 2024 has caused the Fed to proceed more cautiously. There are 8 members of the FOMC that think 50 bps in cuts will be warranted by end-2024, while 7 are expecting 25 bps, and 4 foresee no cuts at all. This is a big departure from just three months ago, when most members were expecting three cuts this year.
• The Fed clearly needs to see more evidence that inflationary pressures are easing. While we'd argue that the trend has improved since April, with today's CPI report substantiating that view, the bar has been raised for the Fed. This has markets lowering the odds of a September rate cut. As of writing, the market is no longer priced for two full 25 bps cuts this year – leaning more towards the median of the FOMC. We'd agree with that. We recently pulled back the timing of rate cuts, as economic growth and inflation have yet to convincingly provide the Fed with enough evidence that cuts are warranted.     

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