The Federal Reserve is now calling for only one interest rate cut in 2024. But their forecast is likely overly cautious, and we think there will be two or more cuts this year.

As was widely expected, the Fed kept the federal-funds rate unchanged at a target range of 5.25%-5.50% at its June meeting. At the start of the year, markets expected rate cuts to be in full swing by this point. However, cuts have been delayed because of inflation’s upward surprise in early 2024.

More newsworthy are the new economic projections from the Federal Open Market Committee, last updated at the March meeting. The Fed is now expecting a December 2024 federal-funds rate of 5.1%, implying one 0.25% cut from current levels. By contrast, in March the Fed called for a 4.6% rate, implying three rate cuts.

Inflation shot up in the first quarter after being subdued in the second half of 2023. Core PCE inflation reached 4.4% annualised in the three months ending in March 2024, compared with 1.9% in the six months ending December 2023.

More recently, however, inflation has started to cool again, with core PCE inflation falling to 2.8% annualised in the three months ending in May (our estimates for May itself are based on CPI data). Suddenly, a benign environment for inflation could be returning, with the first-quarter uptick an aberration.

Making Progress on Inflation?

Wednesday’s Fed’s press release acknowledged “modest further progress toward the Committee’s 2% inflation in recent months” – a shift in language from “a lack of further progress” noted in the May meeting’s press release. Still, the Fed upped its forecast for core PCE inflation in the fourth quarter of 2024 to 2.8% year on year, from 2.6% during the March meeting. This largely accounts for why the central bank has shifted to calling for just one rate cut rather than three in 2024.

It’s unclear to what extent Wednesday’s CPI news was reflected in the latest Fed projections. Chair Jerome Powell mentioned that FOMC members can alter their forecasts post-release, but “most” generally don’t. The inflation projections imply a roughly 2.5% annualised core PCE inflation rate in the final six months of 2024, by our estimates. That marks no progress compared with the 2.5%-2.6% year-over-year core PCE inflation rate likely for May.

That’s too pessimistic, in our view. Instead, we see core PCE inflation at 1.7% annualised in the

US interest rate cuts remain far off, although Federal Reserve Chair Jerome Powell and the rest of the central bank seem unfazed by the inflationary uptick in recent months.

As widely expected, the Fed kept the federal-funds rate unchanged at 5.25%-5.50% at its May meeting. While back at the start of 2024, markets expected the central bank to begin cutting rates as soon as its March meeting, inflation has run much higher than expected, delaying expected rate cuts until September 2024 or later. The Fed’s official statement Wednesday and remarks from Powell did little to alter that view.

The Fed’s official statement did acknowledge a “lack of further progress” in inflation reduction in recent months. But Powell expressed the strong belief that current monetary policy is “sufficiently restrictive” to eventually return inflation to the central bank’s 2% target, and it’s therefore “unlikely the next policy move will be a [rate] hike.”

While the Fed kept rates steady, it did announce the details of a long-awaited change in its effort to reduce its massive holdings of bonds, a process known as quantitative tightening.

Fed Waiting for More Confidence on Inflation Progress

Inflation in the core Personal Consumption Expenditures Price Index rose to a hot 4.4% annualised in the three months ending in March. Core PCE inflation had been 1.9% annualized in the six months ending December 2023. That strong performance made most market participants expect rate cuts starting in early 2024, but those expectations have been seesawing because of data in recent months.

Meanwhile, the Fed has focused more on year-on-year data, which is less volatile than the three- or six-month indicators. In year-on-year terms, core PCE inflation was 2.9% in December 2023 and stood at 2.8% as of March 2024. This led the central bank to be far less ebullient than most investors at the beginning of 2024, and conversely not overly perturbed by the bumpiness of a few months of bad data.

Powell stated that “gaining sufficient confidence” on inflation progress to begin cutting rates “will take longer than previously expected.” But this likely references the Fed’s prior projections from March, which incorporated three rate cuts in 2024, while markets had shifted to expecting just one cut in 2024 well before today’s meeting.

Fed Announces Quantitative Tightening Change

Longer-term bond yields moved a bit more than the shorter end, with the 10-year Treasury yield down about 5 basis points on