The Federal Reserve announced on Wednesday that it will be keeping its key interest rate unchanged, signaling that only one cut is expected before the end of the year. The Federal Open Market Committee policymakers have taken two rate reductions off the table from the three that were indicated in March, in a move that left markets expecting a more accommodative central bank.

The committee also believes that the long-run interest rate is higher than previously indicated, providing new forecasts that suggest inflation is on track to return to the Fed’s 2% goal. This optimism allows for some policy loosening later this year, as the post-meeting statement noted that inflation remains elevated but has eased over the past year.

Traders appeared encouraged by the Federal Reserve’s comments, as the S&P 500 soared to a record high on Wednesday following the statement’s release. The closely watched “dot plot” of individual participants’ rate expectations demonstrated a more aggressive cutting path in 2025, with four reductions totaling a full percentage point anticipated, up from the previous three expected cuts.

The Federal Reserve participants raised their 2024 outlook on inflation to 2.6%, and excluded food and energy prices projecting 2.8%, both of which were higher than March projections by 0.2 percentage points. The long-run rate of interest also moved up to 2.8% from 2.6%, indicating a higher-for-longer narrative gaining traction among Fed officials.

Federal Reserve Chair Jerome Powell emphasized that the recent consumer price index report showed progress and built confidence, but he stated that current conditions did not warrant the beginning of policy loosening at this time. Despite concerns about inflation being above the 2% target, GDP growth is tracking at a solid pace, with the Atlanta Fed estimating a 3.1% growth rate.

While economic data in the first quarter of 2024 softened compared to the previous year, inflation remains a concern for central bankers as it continues to be above the target rate. Although markets initially expected more rate cuts, strong economic growth has allowed the Federal Reserve to carefully navigate inflation without jeopardizing job growth.

Overall, the Federal Reserve’s decision to keep interest rates stable with the expectation of a single cut by year-end reflects a cautious approach to monetary policy. The balance between addressing inflation concerns and supporting economic growth remains a key challenge for central bankers moving forward. The evolving economic landscape will require ongoing monitoring and adjustment of policies to ensure stability and growth in the coming months.

Finance

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