Federal Reserve officials continue to slow-play rate cuts, a good news-bad news scenario for the U.S. economy.
On the bright side, the Fed has yet to cut rates because the economy remains strong. One piece of evidence is a national unemployment rate that’s just 4%. However, investors and borrowers have been anxiously awaiting a rate cut. Investors are poised to push stocks even higher, while borrowers are keen on cheaper costs of money.
They’ll have to keep waiting. At its June meeting, the central bank kept its benchmark federal funds unchanged, at a range of 5.25% and 5.5%.
The Federal Open Market Committee meets four more times this year, in July, September, November and December, and expectations for a rate cut have dwindled. The consensus now is that there might be just one rate cut in 2024.
Inflation, meanwhile, was at 3.3% in May, well above the Fed’s target of 2% — but well below the pandemic highs. “We’ve made pretty good progress on inflation,” Federal Reserve Chairman Jerome Powell said at a June news conference announcing the FOMC’s latest decision.
Before he agrees to rate cuts, Powell said, “we’ll need to see more good data.”
“We don’t think it’ll be appropriate to reduce rates and begin to loosen policy until we have more confidence that inflation is moving back down to 2 percent on a sustainable basis, and that’s the test we’ve applied,” Powell told reporters.
In one sign of progress, core prices, which exclude volatile food and energy items, posted their smallest gains since 2021 and rose 0.2% from April, below economists’ expectations. A broad slowdown in inflation could help Fed policymakers restore their confidence that inflation will return to their target.
Powell also noted that the labor market is returning to normal. He pointed to factors such as an increase in the number of workers in the official labor force, fewer job openings advertised by employers and an official unemployment rate that has moved up from 3.4% to 4%.
“By so many measures, the labor market was, was kind of overheated two years ago,” he said. “And we’ve seen it gradually move back into much better balance between supply and demand.”
One driver of inflation has been the housing market, which remains in flux after the sharp rise in interest rates since 2022.
“Ultimately, the best thing we can do for the housing market is to bring inflation down so that we can bring rates down so that the housing market can continue to normalize,” Powell said. “There will still be a national housing shortage, as there was before the pandemic.”
Even as he carefully parsed his words – as all Fed chairs do to avoid rattling markets – Powell also downplayed the import of a single rate cut.
“If you look back in 5 or 10 years and try to pull out the significance to the U.S. economy of one 25 basis point rate cut, you’d have quite a job on your hands,” Powell said.
That bit of perspective is a meaningful one for investors to consider. While the financial media breathlessly covers every FOMC meeting, a single policy change is unlikely to change the direction of markets.
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