Fed’s Stance on Rate Cuts Hinges on Inflation Confidence
Federal Reserve officials observed an easing in financial conditions during their June meeting but emphasized that rate cuts will not occur until there is “greater confidence” that inflation is sustainably moving toward the 2% target.
Easing Financial Conditions
The primary factor behind the easing of financial conditions was higher equity prices and a consensus among market participants that the federal funds rate has peaked, according to minutes from the Fed’s June 11-12 meeting, published Wednesday. Despite keeping the policy rate steady in the 5.25%-5.50% range for a year, officials noted that inflation reduction progress had been slower this year than expected in December.
Diverse Views on Rate Cuts
Some Fed participants stressed the need for patience before cutting rates, while others mentioned the potential necessity to raise rates further if inflation resurges. The meeting minutes highlighted that while inflation saw a significant decline in the latter half of 2023, early 2024 exhibited “a lack of further progress” toward the 2% target.
Inflation Progress and Concerns
The Committee does not foresee reducing the target range until it has “greater confidence” that inflation is moving sustainably toward 2%. Some progress was noted, such as smaller monthly changes in the core PCE price index and a lower trimmed mean inflation rate for April. However, the Fed remains concerned about elevated inflation harming the purchasing power of households, particularly those least able to meet higher costs of essentials like food, housing, and transportation.
Fed Chair’s Remarks on Disinflation
Fed Chair Jerome Powell stated at a monetary policy conference in Portugal that data for April and May suggest the economy is “getting back on a disinflationary path” after persistent high inflation reports at the beginning of 2024. Powell emphasized the need for more confidence in inflation moving sustainably down to 2% before starting to loosen policy.
Projected Rate Cuts
The path of the federal funds rate has shifted slightly lower, with the minutes indicating a one-and-one-half 25 basis point cut by year-end. This shift appears to reflect changes in perceived risks rather than base-case expectations, with “at most, one cut this year.” The Federal Open Market Committee (FOMC) “dot plot” confirmed a one-quarter percentage point cut by the end of 2024, down from three indicated during the last update in March. Despite this, markets continue to project at least two cuts, with the first one anticipated in September
