• As expected, the Federal Reserve kept interest rates steady at their June 12th meeting and made no changes to its balance sheet reduction program.
• However, the Summary of Economic Projections (SEP) showed that the median FOMC member anticipated higher inflation over the next two years than was the case in the March SEP. These expectations incorporated today’s encouraging CPI readings.
• Additionally, the June SEP showed just one 25 basis points (bps) cut in 2024. Still, the associated dot plot suggested that many FOMC members believe that two 25 bps rate cuts are still possible.
• The Conference Board continues to forecast two 25 bps cuts this year – one in November and one in December, because our economic outlook for the year is less optimistic than the Fed’s. We will update these views as additional data become available.
• Finally, the longer run outlook for inflation rose as FOMC members increasingly believe that the neutral interest rate has drifted higher compared to prior to the pandemic. This is consistent with our view that interest rates will likely be higher going forward than what was experienced prepandemic.

Highlights

At the June FOMC meeting, the Fed left rates unchanged and lowered its guidance on interest rate cuts to just a single 25 basis points reduction in 2024 (although many on the committee did think two cuts are still a possibility).

On the economy, Chair Powell said that the Fed expects GDP growth to slow from last year’s elevated pace as tight monetary policy and financial conditions continue to weigh on economic activity. This is unchanged from the March meeting.

However, the June SEP showed that FOMC participants raised their expectations for inflation in 2024 and 2025. According to Chair Powell, this was due to the stalled progress on inflation seen in Q1 2024 and concerns about base effects in year-on-year inflation readings later this year. Also, the longer run outlook for inflation also rose as FOMC members increasingly believe that the neutral interest rate has drifted higher compared to prior to the pandemic.

While inflation remains too high, Powell said that much progress toward achieving the 2% target was seen in 2023. He reiterated that the FOMC is waiting for more encouraging inflation data to come in before it starts to cut rates. He noted that today’s CPI report was unexpectedly encouraging, but that the Fed would need to see several months of similar data before cuts would occur. However, the June SEP does not anticipate lower inflation readings (like that seen today) to occur going forward.

What were the Fed’s actions?

After implementing 525 basis points of interest rate hikes since early 2022, the FOMC elected to hold the federal funds rate window at 5.25 – 5.50% again in June. Rates remain in ‘restrictive’ territory (anything above 3%). Regarding the Fed’s balance reduction program (known as Quantitative Tightening) there were no changes in June. The last set of changes occurred at the May FOMC meeting, where it announced that the pace of asset reductions would decelerate starting on June 1^st.

What are the Fed’s expectations for the future?

The Federal Reserve’s June SEP (see figure) painted a different picture of the future than the March SEP. Expectations on overall economic growth were unchanged, but FOMC committee members increased their inflation forecast for 2024 and 2025 and reduced their expectations on rate cuts to just a single 25 bps decrease this year (vs. three in the March SEP).

Our expectations for overall economic growth are more pessimistic for 2024, due to our forecast for a mid-year slowdown, but is similar to the FOMC’s for 2025. This weakness, in our view, should help lower inflation more rapidly than the June SEP suggests. Lower inflation should, in turn, yield two 25 bps interest rate cuts in Q4 2024.

Finally, the June SEP saw an increase in the central tendency for longer run interest rates. This upward drift, according to Chair Powell, is due to an increased number of FOMC participants believing that the neutral rate has risen since the pandemic.