Fed’s June Meeting: Rate Cuts Not in the Cards: What’s Next?

Almost nobody anticipates a reduction in interest rates from the Federal Reserve when its two-day meeting ends on Wednesday.

However, investors and analysts will be watching for hints about when the central bank will really be able to lower its main rate and the number of times it may do so this year.

As the Fed waits for inflation to continue to decline, the benchmark short-term rate has been stuck at a 23-year high of 5.25% to 5.5% since July.

While still above the Federal Reserve’s target rate of 2%, annual inflation in April decreased to 3.4% from 3.5% in the previous month. This is far less than the two-decade high of 9.1% in June 2022.

Due to the early acceleration of inflation this year, the majority of economists have lowered their rate cut projections to two, one, or none this year. Neel Kashkari, the president of the Minneapolis Fed, is among those who have even hinted that a rate hike is unlikely.

Numerous analysts had forecast that interest rates would start to decline before the year even began. This year, they anticipated as many as six or seven rate reductions.

The primary weapon the Fed use to combat inflation is interest rates. High interest rates increase the cost of borrowing, which slows down the economy and expenditure and, in general, lowers inflation.

When will prices drop sufficiently for the Fed to lower interest rates?

Although the odds of a first drop in July are less than 10%, futures markets are still placing bets on one this year, most likely in September when inflation starts to gradually decline again in the coming months, according to the CME FedWatch Tool, which tracks expectations in the market for fed funds rate adjustments.

Each member’s projected fed funds rate will be displayed on Wednesday’s “dot-plot,” which is published by the Fed four times a year. Three rate cuts this year were predicted by the median in March.

Since then, Fed officials have acknowledged that inflation has been dropping rather slowly, and experts predict that the Fed will reduce interest rates this time around. It’s near to decide if there will be one or two, though.

What more will viewers of the Fed meeting be able to see?

The Fed will also share its economic estimates in addition to the dot-plot. From March, most economists predict minimal change.

Morgan Stanley and Wells Fargo anticipate that the Fed will maintain its forecasted 2.1% annual economic growth but raise its 4% unemployment rate to 4.1% or 4.2%.

Most economists anticipate that the Fed will increase its inflation outlook in order to account for the slower-than-expected decline in inflation.

The Fed predicted in March that the core PCE, its preferred measure of inflation, would reach 2.6% by year’s end. The Fed is expected by economists to hike on Wednesday to a rate of 2.7% to 2.9%.

Why is there still so much inflation?

According to Stephen Bittel, founder and chairman of Terranova Corporation, an alternative investment firm that specializes in commercial real estate, rent is one of the “uncontrollable” components of inflation that is still high and makes up roughly one-third of the basket of goods and services used to calculate the consumer price index.

At a conference in Amsterdam last month, Federal Reserve Chair Jerome Powell referred to housing inflation as “a bit of a puzzle.”

Rents for new leases on apartments are barely growing, according to measures of new leases. Although government data, which mostly records lease renewals, hasn’t yet reflected that, it should in the upcoming months.

The unexpectedly high increase in nonfarm payrolls in May of 272,000 and the 4.1% year-over-year increase in salaries on Friday, according to Nationwide Chief Economist Kathy Bostjancic, “should drive a rebound in consumer spending.” This “may help delay Fed rate cuts to later this year or into next year and keep inflation more buoyant.”

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