In an action-packed day, US inflation in May cooled slightly. The US Federal Reserve then held rates steady at its meeting but reduced the number of rate cuts it projects for this year to one from the forecast of two in March and three last December.
The prediction of a single rate cut surprised investors and economists, many of whom had expected the Fed to still aim for two reductions before the end of the year.
The Fed left borrowing costs on hold at the meeting at a 23-year high of between 5.25% and 5.5%.
That worried some investors—the Dow eased, but the S&P 500 crawled to a new peak, and the Nasdaq surged as Apple’s shares had a second big gain in a row, boosting its value and that of the entire tech sector.
US inflation fell to 3.3% in May, down from 3.4% in April. Month-on-month, the CPI was steady in April, whereas the forecast was for a rise of 0.1%.
Monthly and yearly core CPI readings (which exclude the volatile prices associated with energy and food) were also lower than expected—slightly better than the reports for April and March.
This was noted by the Fed in its post-meeting statement: “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.”
However, this was tempered by the comment, “Inflation has eased over the past year but remains elevated.” This was milder than in the previous statement, which noted “a lack of further progress” on inflation.
The CPI was released at 8:30 a.m. Wednesday, US time. Five and a half hours later, the Fed dashed expectations for maintaining a two-rate cut projection in the quarterly dot plot, and the market had to settle for one.
For the period through 2025, the Fed now sees five total cuts equaling 1.25 percentage points, down from six in March. If the projections hold, it would leave the federal funds rate benchmark at 4.1% by the end of next year.
Elsewhere in the Fed’s forecasts, members raised their 2024 outlook on inflation to 2.6%, or 2.8% when excluding food and energy. Both inflation forecasts were 0.2 percentage points higher than in March.
Fed Chair Jay Powell told his regular post-meeting briefing that the May CPI report was better than almost anyone had expected and was factored into the latest Fed decision.
“We see today’s report as progress and as, you know, building confidence,” Powell said. “But we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”
There was one interesting bit from the Powell media conference: none of the 19 members of the open market committee see the need for a rate rise, even though the number of people forecasting no rate cut this year doubled to four.
“We think policy is restrictive. And we think, ultimately, that if you just set policy at a restrictive level, eventually you will see real weakening in the economy,” he said. “So, that’s always been the thought: since we raised rates this far, we’ve always been pointing to cuts at a certain point.”
“Not to eliminate the possibility of hikes, but no one has that as their base case,” Powell said. “No one on the committee does.”