The Federal Reserve held interest rates steady on Wednesday and pushed out the start of rate cuts to perhaps as late as December, with officials projecting only a single quarter-percentage-point reduction for the year amid rising estimates for what it will take to keep inflation in check.
The central bank held steady its benchmark federal-funds rate in a range between 5.25% and 5.5%, a two-decade high.
The markdown in the outlook for rate cuts, from three quarter-percentage-point reductions seen in the Fed’s March projections, was made despite the central bank’s acknowledgement in its new policy statement of “modest further progress” towards its 2% inflation target — an upgrade from its May 1 statement.
It coincided with an increase to 2.8% in the estimated long-run, or “neutral,” rate of interest, from 2.6%, which indicates policymakers have concluded the economy needs more restraint in order to finish the battle against rising prices.
Recent progress has been slow, and Fed officials now project a slightly higher end-of-year inflation rate of 2.6% versus the 2.4% anticipated as of March.
While rate cuts are now seen getting a likely later start and a slower pace this year than investors have anticipated, the Fed’s policy rate is seen falling fast next year, with reductions of a full percentage point in both 2025 and 2026.
The statement and new Summary of Economic Projections show a central bank wrestling over how to respond to data that many read as pointing to slower inflation — consumer prices in fact did not rise at all in May on a month-over-month basis, according to data released on Wednesday — but also to steady growth and job creation.
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