Federal Reserve officials maintain their view for three rate cuts this year but expect fewer in 2025 due to rising inflation. The benchmark federal funds rate remains steady at 5.25% to 5.5%, the highest since 2001. Policymakers signal a plan to cut rates this year for the first time since March 2020.
They foresee three reductions in 2025, down from four projected in December. “The risks to achieving its employment and inflation goals are moving into better balance,” the Federal Open Market Committee states. The S&P 500 rises, while Treasury yields and the Bloomberg Dollar index fall.
Traders increase the likelihood of rate cuts starting in June. The Fed maintains its stance that rate cuts will wait until inflation shows sustainable movement toward the 2% target. The central bank plans to continue reducing its balance sheet by up to $95 billion monthly. Some, like Dallas Fed President Lorie Logan, suggest slowing the pace of asset portfolio reduction. Fed officials stress they won’t rush to lower borrowing costs until inflation is contained.
Market expectations show a slightly better than 50-50 chance of the first cut in June, with about three cuts this year. Fed projections vary, with some seeing more cuts while others anticipate fewer. Officials note projections are not set in stone and may change based on incoming data. Inflation and economic growth forecasts for 2024 are adjusted, with underlying inflation now at 2.6% and growth at 2.1%.
The unemployment rate projection for 2024 is lowered to 4%. Lower-than-expected inflation readings in 2023 led to discussions about rate reductions. However, a rise in key price gauges complicates the situation. Powell suggests the central bank is nearing the confidence needed to lower rates, but emphasizes patience.
Fed officials stress caution with the economy stable and inflation above target. The Fed maintains its nonpartisan stance, insisting its decisions are independent of politics. Rate cuts that boost the economy could influence the presidential election.
