Highlights:
The Federal Reserve kept interest rates unchanged, in line with market expectations.
The resolution statement no longer mentions lack of further progress in lowering inflation, but rather achieving moderate progress, and reiterates that the Fed will need to be more confident in inflation falling to 2% before cutting rates.
The dot plot shows that no one expects three rate cuts this year, whereas over half of officials expected at least three last time. Nearly 80% of officials now expect at least one rate cut, doubling the number of officials who do not expect a rate cut this year to four.
The median interest rate forecast shows that the Fed expects to cut rates once this year, compared with two cuts last time, and has raised its neutral interest rate expectation twice in a row, with a total of 30 basis points this year.
This year's GDP and unemployment rate expectations remain unchanged, while PCE and core PCE inflation expectations have both risen by 0.2 percentage points.
According to the 'Xinmei Federal Reserve News Agency', the dot plot shows that a rate cut this year is the Fed's benchmark forecast, even if May CPI shows inflation improvement, Fed officials are not in a hurry to cut interest rates.
Despite recent data showing a cooling of inflation in the United States, the Fed has significantly cut its expectations for rate cuts this year.
On Wednesday June 12, the Fed announced after the FOMC that the target range for the federal funds rate remains at 5.25% to 5.50% . Since last July's rate hike, this policy rate has remained at its highest level in over 20 years.
In this round of tightening cycle beginning in March 2022, the Fed has not raised interest rates for seven consecutive meetings. The FOMC voting members unanimously agreed with the rate decision, marking the 17th consecutive unanimous decision period since July 2022, the longest since September 2005.
The Fed's decision to keep rates unchanged this time is in line with market expectations, but the updated dot plot shows that Fed officials have significantly lowered their expectations for rate cuts this year, from three shown on the last dot plot to one, and did not cut rates twice as expected by recent market expectations.
After unexpectedly cool May US CPI data was released earlier on Wednesday, core CPI had its slowest growth rate in three years. Afterwards, investors increased their bets on Fed rate cuts. Pricing of swap contracts fully reflects traders' expectations that there will be two 25 basis point rate cuts this year, with the first cut in November, and bond traders expect the possibility of a rate cut as early as September to increase.
Journalist Nick Timiraos, known as the 'New Fed News Agency', interpreted the dot plot this time, saying that at this time seven people expect one rate cut, and eight people expect two rate cuts, which means that a more concentrated majority of Fed officials expect one rate cut this year, which is the benchmark forecast situation.
The article released by Timiraos pointed out that Fed officials expect only one rate cut this year, suggesting that even if the CPI report, which is widely watched by outsiders, shows an improvement in May US inflation, Fed officials are not in a hurry to cut rates.
The dot plot shows that no one expects three rate cuts this year, and four people expect no rate cuts this year.
Compared with the last updated dot plot in March, this time Fed officials have significantly reduced their expectations for rate cuts this year. Among the 19 Fed officials who provided interest rate forecasts, only eight expect the policy rate to fall below 5.0% this year, compared with 15 officials who projected this last time.
All eight who forecast that the rate would be between 4.75% and 5.00%, or two rate cuts, up from five last time. No one forecast that the rate would be below 4.75%, meaning no one expected three rate cuts, while nine forecast between 4.50% and 4.75%, or three rate cuts last time.
Seven people expect the rate to be between 5.0% and 5.25% this time, and seven people expect one rate cut this year, up from only two who predicted the same last time.
Four people expect the rate to be between 5.25% and 5.0% this year, equivalent to four people who do not expect a rate cut this year, up from two last time. One official predicted four rate cuts this year last time, and no one expected this year.
Including the eight officials who forecast that the rate would be lower than 5.0%, a total of 15 officials, or 79% of the total, expected at least one rate cut this year, doubling the number of officials who did not expect a rate cut this year to four.
As shown in the following comparison between this year's expected rate dot plots and last year's expected rate dot plots, 10 Fed officials made dovish forecasts for at least three rate cuts this year last time, while no one made such forecasts this time, prompting comments that this time it is a hawkish dot plot adjustment.
Expected rate cut frequency this year was reduced from twice to once, and neutral interest rate expectations were raised twice in a row.
According to the median interest rate forecast of Fed officials released after the meeting, compared with the previous forecast in March, Fed officials expect the level of interest rates to be raised by 50 basis points, equivalent to a 50 basis point reduction in interest rate expectations this year, to 25 basis points, satisfying only one interest rate cut, while the previous expected reduction was 75 basis points, or three interest rate cuts.
The expected rate cut for next year was also reduced, with a reduction of less than one interest rate cut expected, with an expected drop of 100 basis points next year.
The specific median forecasts are as follows:
The federal fund rate at the end of 2024 will be 5.1%, up 50 basis points from the previous forecast of 4.6% in March of this year.
The federal fund rate at the end of 2025 will be 4.1%, up 20 basis points from the previous forecast of 3.9% in March.
The federal fund rate at the end of 2026 will be 3.1%, unchanged from the March forecast.
The longer-term federal funds rate will be 2.8%, up 20 basis points from the March forecast of 2.6%.
The figure below shows Fed officials' dot plot of interest rate expectations for this year, next year, and longer-term (gray dots) in March, as well as the dot plot of interest rate expectations for the same period in June (blue dots).
It is worth mentioning that the Fed has raised its longer-term interest rate expectations twice in a row, raising them by 10 basis points to 2.6% last time and another 20 basis points this time. In other words, within six months, the Fed has raised its expectations for the so-called neutral interest rate by 30 basis points.
This year's GDP and unemployment rate expectations remain unchanged, while PCE inflation expectations have been raised by 0.2 percentage points.
According to the economic outlook released after the meeting, Fed officials maintained their GDP growth expectations for the next three years and longer-term, and slightly raised their unemployment rate expectations for next year and beyond by 0.1 percentage points. They also raised their expectations for PCE and core PCE inflation this year by 0.2 percentage points, with both inflation indicators expected to increase by 0.1 percentage points next year.
The specific adjustments are as follows:
The expected GDP growth rate in 2024 is 2.1%, with expected growth rates of 2.0% in 2025 and 2026, and a longer-term expected growth rate of 1.8%, all unchanged from the March forecast.
The expected unemployment rate in 2024 remains unchanged from the March forecast at 4.0%, while the expected unemployment rate in 2025 is 4.2%, up from 4.1% in March 2016 and 4.0% in March, and the longer-term expected unemployment rate after 2026 is 4.2%, up from 4.1% in March.
The expected PCE inflation rate in 2024 is 2.6%, up from 2.4% in March, while the expected inflation rate in 2025 is 2.3%, up from 2.2% in March, and the expected inflation rate in 2026 and longer-term is 2.0%, all unchanged from the March forecast.
The expected core PCE inflation rate in 2024 is 2.8%, up from 2.6% in March, while the expected inflation rate in 2025 is 2.3%, up from 2.2% in March, and the expected inflation rate in 2026 is unchanged from the March forecast of 2.0%.
The resolution statement changed to say that moderate progress has been made in lowering inflation and continues to reiterate that the Fed will only cut interest rates if it is more confident that inflation will meet its targets.
Compared with the Fed's monetary policy meeting statement from April 30th to May 1st, this statement has not changed much, and the most obvious change is the description of inflation.
The previous statement stated that there has been no further progress towards achieving the Fed's inflation target of 2% in recent months. This has been changed to 'moderate further progress has been made towards achieving this inflation target in recent months.'
The other major change this time is the deletion of specific action expressions regarding the reduction of quantitative tightening (QT) plans from the previous statement.
The previous statement revised the wording of the asset deleveraging plan for the first time in nearly two years, announcing a reduction in the monthly upper limit for US Treasury deleveraging from $35 billion to $25 billion starting this month with no change to the upper limit for institution mortgage-backed securities (MBS).
This time, those wordings were deleted and changed to FOMC will continue to reduce its holdings of US Treasuries, institutional debt, and institutional MBS.
In addition, other content in this statement was carried over from the previous statement.
This statement maintains the unchanged forward guidance on interest rates from January of this year, reiterating that the FOMC believes it is not appropriate to lower rates until they are more confident that inflation will move closer to 2%.
The statement continues to emphasize the Fed's firm commitment to returning the inflation rate to the 2% target. It also continues to reiterate the addition made in January that the economic outlook is uncertain and that the Fed continues to closely monitor inflation risks. As in the previous statement, this statement also says that the risk of achieving employment and inflation targets in the past year is moving toward a better balance.
The red text below shows the content deleted and added in this resolution statement compared to the previous one.
The dot plot shows that there will only be one interest rate cut this year, completely unexpected by Wall Street.
In its report, Deutsche Bank pointed out that the Fed unexpectedly indicated in the dot plot at this meeting that it would only cut interest rates once this year, below the three times in March. Analysts emphasized that although Powell did not emphasize this hawkish signal, he did deliberately play down the weak CPI data released on the same day, only saying "welcome today's CPI data and hope to see more data like this."
Bank of America analysts also believe that the dot plot showing only one interest rate cut this year "completely surprised" them, and the bank originally expected the dot plot to show at least two cuts. However, the meeting statement and Powell's speech showed a moderately dovish attitude:
Today's inflation data is a welcome sign that the US economy is capable of growing at a moderate to steady pace while inflation slows. The next step should be an interest rate cut, but when to cut rates remains to be seen. Our view is that the interest rate cut will be later than the current pricing in the financial markets.
However, Deutsche Bank pointed out that although the dot plot shows that most FOMC members expect only one interest rate cut this year at the June meeting, the bank believes that most officials usually do not adjust their forecasts on the day of the meeting. In other words, the dot plot may not accurately reflect the impact of May CPI data. Analysts believe that the weak inflation data in May still opens the door to interest rate cuts before the November election, but Deutsche Bank's benchmark forecast is still for one cut in December.
Bank of America also stated that the Fed still maintains its outlook for economic growth unchanged, which surprised analysts. Bank of America originally predicted that the Fed would lower its economic growth forecast for this year.
At the June meeting, the Fed also raised its overall and core personal consumption expenditure (PCE) inflation forecasts for 2024 by 0.2 percentage points to 2.6% and 2.8% respectively. The inflation rate for 2025 was raised to 2.3%. Bank of America believes that these forecasts indicate that the Fed can implement restrictive policies for a longer period of time to achieve its macroeconomic goals.
Interest rate decisions depend not only on inflation, but also on overall data that includes employment and economic growth.
Deutsche Bank also captured that Powell mentioned in his speech that interest rate decisions do not only depend on inflation, but also on "overall data", including labor market and economic growth data.
Analysts wrote:
He (Powell) believes that these data may send important signals that the economic situation is consistent with sustainable return to the 2% inflation level. This framework is worth noting because it suggests that if inflation progresses significantly but the labor market and economy continue to perform strongly, the Fed may choose to keep rates unchanged for a longer period of time.
Judging from the wording of the speech, Powell's description of the economy and labor market has some hawkish elements. He called the economy and labor market "strong" or "stable". As for growth momentum, Powell pointed out that although they have seen some evidence of pressure on low-income families, overall consumer spending is still strong.
Regarding the labor market, although he emphasized that "a range of broad indicators" (job vacancies, resignation rates, unemployment rates, and continuously improving supplies) have shown clear signs of balance, he said that the unemployment rate is still at a "historical low". In April and May, 218,000 employment positions each month were "still strong", and the rate of wage growth was still higher than the level of 2% price inflation.
In addition to wage growth, Powell also mentioned other factors that may make price inflation more sticky. He said that the rise in import prices may be transmitted to consumer prices. In addition, Powell pointed out that inflation in housing services may take some time to return to a more normal level, and the rent inflation in the May CPI report is disappointing.
What scenario will push the Fed to cut rates before the election? Deutsche Bank believes that this requires similarly moderate inflation data in the coming months, as well as a synchronous slowdown in economic growth and labor market data, and a tightening financial environment.
The most important time to cut interest rates is when the Fed is confident that the inflation rate is on a sustainable path to 2%. Powell explained that the median core PCE forecast for 2024 is 2.8%, which means that in the remaining time of this year, inflation is "good, but not very good."
Although Powell did not emphasize the hawkish signal of the dot plot, he did not specifically indicate that the possibility of cutting interest rates before the election is particularly high. Although the outlook for this result has improved with the softening of May CPI data, the signal of the June FOMC meeting indicates that to cut interest rates in September, sustained low inflation data, the cooling of economic growth and labor markets, and a tightening financial environment must all be in place.
Editor/Somer