Fed holds steady on benchmark interest rate, signals just one cut this year

Central Bank chair sees recent inflation easing as progress, but more confidence needed

As expected, the Federal Reserve stood pat following its June monetary policymakers’ meeting, holding steady on an anchor interest rate of 5.25% to 5.5%.

The benchmark rate will now stay at its highest point in 23 years at least until the July meeting of the policy-setting Federal Open Market Committee (FOMC), and likely longer given the Fed’s longstanding stance seeking more data to underpin confidence in sustainable disinflation.

Perhaps more important than the widely predicted lack of a rate cut itself were the signals sent by the Fed after the announcement. The post-meeting statement released by the FOMC was largely unchanged from June, acknowledging that inflation has cooled but remains elevated. The only real change was an encouraging one, replacing language noting “a lack of further progress” on taming inflation with verbiage recognizing “modest further progress” in recent months toward the Fed’s 2% inflation goal.

That’s an encouraging indication, although further signs from the FOMC and the Fed at large presaged further hawkishness, or at the very least, further disinclination to lower rates sooner rather than later. Participants in the FOMC’s quarterly Summary of Economic Projections (SEP) raised their forecast for 2024 inflation to 2.6%, 0.2 percentage points above their March prognostication.

The committee’s most recent SEP also has four Fed officials in favor of no cuts in 2024, up from two in the prior dot plot. The committee is now projecting five rate decreases through 2025, one less than it had predicted in March. Meanwhile, SEP projections for the benchmark rate at the end of 2024 imply that just one rate cut is in the cards this year.

The Fed has long repeated a stance of “needing more confidence” before taking the rate-cut leap, and Fed Chair Jerome Powell was quick to utter the familiar refrain during his post-meeting press conference. He described the May CPI report, which was released earlier in the day, as “progress” and “building confidence,” but later reiterated that “it’s only one reading.”

“We don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time,” Powell said.

He did note that he believes the Fed’s monetary policy actions are having the proper effect on inflation. It’s just a matter of seeing the amount of progress to instill that elusive confidence.

“The question of whether it’s sufficiently restrictive is going to be one we know over time,” he said. “But I think for the reasons I talked about at the last press conference and in other places, I think the evidence is pretty clear that policy is restrictive and is having the effects that we would hope for.”

It’s back to a holding pattern, then, for a mortgage market that had hopes for an initial rate cut by June at the start of the year, but now is hoping to have one materialize by the fall. Most observers, including experts at Fannie Mae, Wells Fargo and Citigroup, are still forecasting the first cut in September.

“Our base case forecast since early April has looked for a 25-bps rate cut at each of the September and December FOMC meetings,” wrote Wells Fargo economists Sarah House and Michael Pugliese in commentary released after the FOMC meeting. “For now, our forecast remains two cuts this year and another 100 bps of easing in 2025.”

“We are back to data-watching. There were no huge surprises in the Fed’s comments or dot plot,” said Melissa Cohn, regional vice president of William Raveis Mortgage in Connecticut. “Expecting one rate cut should be neutral for the markets, and the Fed’s future actions will depend on the markets. Let’s hope that we see the CPI report next month to show further progress on inflation — then we will have a good summer for mortgage rates and the real estate market.”

Eric Orenstein, senior director at Fitch Ratings, was likewise cautiously optimistic.

“Even with the Fed pumping the brakes on potential rate cuts, larger mortgage companies could be in line for better earnings in the coming months with homebuying picking up and less competition for originations compared to last year.”


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