Federal Reserve projects just one US interest rate cut this year

US central bank scales back expectations but notes 'further modest progress' in taming inflation

Federal Reserve chairman Jerome Powell leaves the Fed's William McChesney Martin building in Washington. AFP

The Federal Reserve on Wednesday downgraded its rate-cut expectations for 2024, projecting it would lower US interest rates once this year in a clear signal that plans to ease its restrictive stance have been delayed.

Updated projections from the Fed's June 11-12 meeting showed policymakers expect US rates will be lowered to 5.1 per cent this year.

The Fed previously forecast three rate cuts this year, but stalled progress in taming inflation and a strong labour market have forced officials to scale back their estimations.

Fed Chair Jerome Powell told reporters that inflation readings from earlier this year "has not given us that greater confidence" that inflation is moving towards its 2 per cent goal.

"The most recent inflation rates have been more favourable, and there has been modest further progress," Mr Powell said.

“We’ll need to see more good data to bolster our confidence that inflation is moving sustainably towards 2 per cent."

The US central bank projects rates will fall to 4.1 per cent and 3.1 per cent in 2025 and 2026, respectively.

The projections show that while the Fed scaled back rate cuts this year, it now pencils in four quarter-point cuts in 2025.

“Rate cuts that might have taken place this year take place next year,” Mr Powell said.

“There are fewer rate cuts in the median this year, but there’s one more next year.”

More delays will put the Fed further behind regulators of advanced economies, such as the European Central Bank and Bank of Canada, which began cutting rates last week.

The new projections will also serve as an indicator for the long-term outlook for rates in Gulf Co-operation Council countries, with central banks in the UAE and Saudi Arabia following the Fed's decisions.

The Central Bank of the UAE announced it would hold rates steady at 5.4 per cent following the Fed's announcement.

The Fed's expectations were released concurrently with its rate decision. The Fed left its target range unchanged at 5.25 per cent to 5.50 per cent.

June's economic projections come after months of data showing the Fed's difficult path to returning to 2 per cent inflation.

Fed officials have said in recent weeks they need several months of positive data before they are in a position to cut rates.

Mr Powell and his colleagues on the Federal Open Market Committee have been trying to engineer a soft landing, where they reduce inflation without steering the world's biggest economy into a recession.

Fed officials have recently noted some progress in taming inflation. Annual CPI inflation has dipped from its peak of 9.1 per cent two years ago to 3.4 per cent, although this is still well above the Fed's target.

Hours before the decision, the Labour Department showed some signs of cooling inflation.

Core CPI – which excludes food and energy prices – rose 3.4 per cent on an annual basis last month, a dip from 3.6 per cent in April.

Last week's jobs report also showed mixed data, surpassing expectations with 272,000 jobs added while the unemployment rate breached 4 per cent for the first time in two years.

Fed officials are looking for a cooling labour market in determining when to make rate cuts.

Some data pointed in that direction, including a three-year low in job openings and a downwardly revised gross domestic product at 1.3 per cent, with the economy growing more slowly in the first quarter than previously reported.

But last week's report dispelled the notion of a cooling labour market.

“As the Federal Reserve seeks confidence in economic data ahead of cutting interest rates, the hopes of a cooler jobs market in the US are now put on hold,” Mahmoud Alkudsi, senior market analyst at ADSS, said in a note.

Fed upgrades inflation projections

In addition to downgrading rate forecasts, Fed now anticipates inflation to be higher than previously thought.

PCE inflation is expected to end the year at 2.6 per cent, up from March's estimation of 2.4 per cent.

Core PCE, which excludes food and energy, is expected to rise 2.8 per cent annually, up from March's projection of 2.6 per cent.

Recent economic data showed that inflation is currently at 2.8 per cent.

Meanwhile, the Fed kept its estimation for the US unemployment rate unchanged at 4.0 per cent, its current level.