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Fed leaves rates unchanged, sees only one 2024 cut despite inflation progress

The Federal Reserve held interest rates steady yesterday and pushed out the start of rate cuts to perhaps as late as December as policymakers sketched out their view of an economy that remains virtually unchanged across its major dimensions for years to come.

With growth and unemployment lodged at levels better than the US central bank considers sustainable in the long run, Fed Chair Jerome Powell said policymakers were content to leave rates where they are until the economy sends a clear signal that something else is needed – through either a more convincing decline in price pressures or a jump in the unemployment rate.

So far, Powell noted in a press conference after the end of a two-day policy meeting, inflation had fallen without a major blow to the economy, and he said there was no reason to think that can’t go on.

“These dynamics can continue as long as they continue,” Powell said. “We’ve got a good strong labor market. We think we’ve been making progress toward the price stability goal. We’re asking … is our policy stance about right? And we think yes, it’s about right.”

The result is the Fed accepting a slow expected decline in inflation back towards its 2% target, with the central bank’s preferred inflation measure – the personal consumption expenditures (PCE) price index – virtually unchanged at the end of this year from its current level and the number of rate cuts held to a single quarter-percentage-point reduction.

Those rate reductions are projected to gather pace next year, with Powell deferring on the timing.

“We don’t make decisions about future meetings until we get there,” he said. “Really, it’s going to be not just the inflation readings. It’s going to be the totality of the data, what’s happening in the labor market, what’s happening with the balance of risks, what’s happening with the forecasts, what’s happening with growth. You’re looking at all of that.”

Inflation data published hours before the release of the policy statement and updated projections showed the consumer price index (CPI) rose not at all on a month-to-month basis in May, causing some analysts to argue the latest projections were already “stale.”

Powell’s characterization of the inflation projections as “kind of conservative” indicated the Fed chief was “keeping the door very much open to a September cut” if inflation continues to weaken, said Krishna Guha, vice chairman of Evercore ISI.

Investors in contracts tied to the Fed’s benchmark interest rate largely kept bets intact that the central bank would approve quarter-percentage-point reductions in September and December.

Powell himself said the decision about the rate path was a “close call” for many policymakers, and that to some degree the Fed had merely traded an earlier start to rate reductions this year by tacking an additional anticipated cut onto 2025.

Still, he called the decision to start policy easing “consequential,” and the drop in expectations for this year completes a broad swing in sentiment from just six months ago when policymakers in their December 2023 forecasts envisioned an imminent kickoff to three years of steady rate reductions.

Under the current projections, absent a surprise in upcoming inflation or jobs data, the cuts would likely not begin until December, moving the Fed’s decision out of the November 5 US presidential election cycle.

Article Source – Fed leaves rates unchanged, sees only one 2024 cut despite inflation progress – RTE

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