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Despite Fed's rate hold, hawkish stance indicates a high chance of rate cuts within the year.

TraderKnows
TraderKnows
06-13

Recently, the Federal Reserve decided not to change interest rates. However, their unexpectedly hawkish stance might reflect in subsequent decisions, potentially leading to rate cuts later this year.

The Federal Reserve kept interest rates unchanged on Wednesday but unexpectedly revealed a hawkish stance, indicating only one rate cut this year due to higher than previously forecasted inflation expectations.

The Federal Open Market Committee (FOMC) maintained the benchmark interest rate in the range of 5.25% to 5.5%.

Although this decision to hold steady is the eighth in a row, Fed members now believe that fewer rate cuts will be needed this year.

Fed members now expect the benchmark rate to drop to 5.1% this year, suggesting only one rate cut in 2024, compared to three rate cuts estimated in March. By 2025, Fed members foresee rates falling to 4.1%, higher than the previous projection of 3.9%, ultimately settling at 3.1% in 2026.

This outlook for rate cuts has not been endorsed by all committee members, with four members supporting no rate cuts this year.

Economists at Jefferies said after the Wednesday decision: "The changes in the Federal Reserve's Summary of Economic Projections (SEP) were more hawkish than we expected."

To indicate concerns about whether the policy remains restrictive in the long term, the Fed raised its estimate of the neutral rate from 2.6% to 2.8%, the rate that neither stimulates nor restricts economic growth.

Due to a series of inflation data exceeding expectations in the first quarter, the Fed raised its inflation forecast, thereby reducing the expected rate cuts this year.

The Fed's preferred measure of inflation—the core Personal Consumption Expenditures Price Index (PCE)—is forecast to be 2.8% in 2024, up from the previous projection of 2.6%. Inflation in 2025 is expected to be 2.3%, higher than the previous forecast of 2.2%.

Despite more stubborn inflation expectations, Fed members did not raise their economic growth forecasts, with the Gross Domestic Product (GDP) forecast remaining at 2.1% this year and 2% next year.

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Interest rate cut

A rate cut refers to the central bank adjusting the interest rate level so that it is lower than before, as a form of monetary policy. It is a means by which the central bank affects the supply and demand relationship in the money market, money creation, and the level of interest rates by changing the level of interest rates. Rate cuts are usually used to counter inflation, stimulate economic growth, or alleviate economic downturn pressures.

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