US Fed signals one rate cut this year

The US Federal Reserve kept its target interest rate unchanged at a 23-year high today while officials signaled they expect to make only one quarter-point rate cut later this year.

The Fed board and policymakers, in their latest economic projections, expect the target rate range will end 2024 near a midpoint of 5.1pc, compared with the 4.6pc midpoint projected in March. That implies one quarter-point cut, down from three possible cuts penciled-in previously.

"We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably" towards the Fed goal of 2pc, Fed chairman Jerome Powell said after the meeting. "As the economy evolves, appropriate assessments of the policy path will adjust in order to best promote our maximum employment and price stability goals."

The Fed's Federal Open Market Committee (FOMC) held the federal funds target rate unchanged at 5.25-5.5pc. It was the sixth consecutive meeting in which the Fed held rates steady following 11 increases from March 2022 through July last year in the most aggressive hiking campaign in four decades.

The decision to keep rates steady was widely expected. CME's FedWatch tool, which tracks fed funds futures trading, had assigned a 99pc probability to the Fed holding rates steady today. The FedWatch tool had earlier signaled two rate cuts later this year, but following a better-than-expected inflation report this morning, FedWatch is now indicating three possible rate cuts, beginning in September.

The Fed's economic projections see core Personal Consumption Expenditures inflation, the Fed's favorite measure of inflation, ending 2024 at a median forecast of 2.8pc from a prior forecast for 2.6pc. Policymakers see inflation falling to a median 2.3pc next year.

The outlook for the unemployment rate for the end of 2024 remained unchanged at 4pc. Policymakers expect gross domestic product (GDP) growth to end the year at 2.1pc, unchanged from prior projections.

The latest policy meeting comes as the Consumer Price Index (CPI) eased to an annual 3.3pc in May, down from 3.4pc in April, the Labor Department reported earlier today. Inflation had ticked up to 3.5pc in March from 3.1pc in January, prompting the Fed to turn more cautious about beginning its rate cuts.

US job growth has surprised to the upside and continues to top pre-Covid levels. GDP growth slowed to a 1.3pc annual rate in the first quarter, from 3.4pc in the fourth quarter of 2023.

By Bob Willis