Federal Reserve officials said Wednesday that inflation has fallen further toward target in recent months, but signaled they plan to cut their benchmark interest rate only once this year.
Policymakers’ forecast of one rate cut was lower than the previous forecast of three, likely because inflation, despite falling over the past two months, remains stubbornly high.
The Fed said in a statement after its two-day meeting that the economy is growing at a strong pace and hiring “remains strong.” Officials also noted that there has been “modest further progress” in recent months toward achieving the 2% inflation target. That’s a more positive assessment than after the Fed’s previous meeting on May 1, when officials said there was “no further progress” on inflation.
Policymakers, as expected, kept the key rate unchanged on Wednesday at around 5.3%. The benchmark rate has remained at this level since July last year, after the Fed raised it 11 times in an attempt to slow borrowing and spending and cool inflation. The Fed’s rate cuts will, over time, ease borrowing costs for consumers who have faced punitively high rates on mortgages, auto loans, credit cards and other forms of borrowing.
Officials’ forecast for rate cuts reflects the individual estimates of 19 politicians. The Fed said eight of those officials were forecasting two rate cuts and seven were forecasting one cut. Four said they were not planning any layoffs at all this year.
The Fed’s updated quarterly forecasts are in no way tied to time. Policymakers often reconsider their plans to cut rates (or raise them) depending on how measures of economic growth and inflation change over time.
On Wednesday morning the government announced that inflation slowed in May for the second month in a row, an encouraging sign that the price acceleration that occurred earlier this year may have passed. Consumer prices excluding volatile food and energy prices – a closely watched “main” index – rose just 0.2% from April, the smallest rise since October. Compared with a year earlier, core prices rose 3.4%, the most moderate pace in three years.
Inflation fell steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing” that would allow it to beat inflation by raising rates without triggering a recession. But at first, inflation turned out to be unexpectedly high. three months this yeardelaying the Fed’s long-awaited rate cut and potentially jeopardizing a soft landing.
In early May, Chairman Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it cut its benchmark rate. Powell noted that it will likely take longer to build that trust than Fed officials previously thought.
Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “a few more months of good inflation data” before he would consider supporting rate cuts. While Waller did not specify what data would be considered good, economists believe it should be core inflation of 0.2% or less each month.