Hawkish resistance from the Fed: Why only one interest rate cut in 2024?

Investing.com - The surprise from the United States Federal Reserve did not come from the decision to keep interest rates unchanged in the range of 5.25 to 5.50% in June, but from the update in economic expectations pointing to slower-than-expected disinflation. This has led the median of the Federal Open Market Committee (FOMC) to anticipate only one rate cut in 2024, instead of the three expected in March.

In the projections listed in the dot plot, it is noted that 4 officials do not expect a rate cut this year, 7 of them anticipate only a 25 basis points (bps) cut in 2024, and 8 expect a 50 bps rate cut this year. This results in the median of the officials considering it appropriate for interest rates to be at 5.1% by the end of the year.

Now, the FOMC's projection for 2024 for PCE inflation in its general and core index has risen by 0.2% compared to what was expected in March, placing it at 2.6% and 2.8%, respectively. For 2025, the projections were adjusted upwards by 0.1%, now forecasting general and core PCE inflation at 2.3%.

"Among the revisions made to the projections of the Fed's main macro variables, it stands out that both general and core inflation projections were increased for 2024 and 2025. Therefore, only one rate cut is now expected in 2024," explained Janneth Quiroz Zamora, Director of Economic, Exchange, and Stock Market Analysis at Grupo Financiero Monex.

FOMC officials also anticipate that rates will remain higher than expected, as the median forecast for 2025 was adjusted to 4.1% at the end of next year, up from the previously anticipated 3.9%, which would imply a 125 bps decrease from the current rate.

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With these adjustments, it became clear that the positive surprise in U.S. inflation in May, which moderated to 3.3% in its annualized reading and fell below economists' expectations, was not enough to give the Fed the confidence to start cutting rates.

"Despite the drop in May, the expectation remains that the Fed will make only one interest rate cut in 2024, with the possibility of not cutting rates if overall inflation stagnates around 3.5% annually in the coming months," stated Gabriela Siller Pagaza, Director of Economic and Financial Analysis at Grupo Financiero Base.

In the press conference following the announcement of the monetary policy decision, Fed Chairman Jerome Powell considered economic prospects uncertain and reaffirmed the statement that the FOMC does not deem it appropriate to reduce the target range for the federal funds rate until there is greater confidence that inflation is moving sustainably toward 2%.

"So far this year, the data has not given us that greater confidence. However, the most recent inflation readings have been more favorable than at the beginning of the year, and there has been modest additional progress toward our inflation goal. We will need to see more positive data to reinforce our confidence that inflation is moving sustainably toward 2%," he noted.

In his address, Powell again warned that reducing policy restraint too soon or too much could result in reversing the progress seen in inflation. Conversely, reducing policy restraint too late or too little could unduly weaken economic activity and employment.

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