Cautious Fed Sees One Rate Cut in 2024

More
newsworthy
are
the
new
economic
projections
from
the
Federal
Open
Market
Committee,
last
updated
at
the
March
meeting.
The
Fed
is
now
expecting
a
December
2024
federal-funds
rate
of
5.1%,
implying
one
0.25%
cut
from
current
levels.
By
contrast,
in
March
the
Fed
called
for
a
4.6%
rate,
implying
three
rate
cuts.

Inflation
shot
up
in
the
first
quarter
after
being
subdued
in
the
second
half
of
2023.
Core
PCE
inflation
reached
4.4%
annualised
in
the
three
months
ending
in
March
2024,
compared
with
1.9%
in
the
six
months
ending
December
2023.

More
recently,
however,
inflation
has
started
to
cool
again,
with
core
PCE
inflation
falling
to
2.8%
annualised
in
the
three
months
ending
in
May
(our
estimates
for
May
itself
are
based
on
CPI
data).
Suddenly,
a
benign
environment
for
inflation
could
be
returning,
with
the
first-quarter
uptick
an
aberration.

Making
Progress
on
Inflation?

Wednesday’s
Fed’s
press
release
acknowledged
“modest
further
progress
toward
the
Committee’s
2%
inflation
in
recent
months”
–
a
shift
in
language
from
“a
lack
of
further
progress”
noted
in
the
May
meeting’s
press
release.
Still,
the
Fed
upped
its
forecast
for
core
PCE
inflation
in
the
fourth
quarter
of
2024
to
2.8%
year
on
year,
from
2.6%
during
the
March
meeting.
This
largely
accounts
for
why
the
central
bank
has
shifted
to
calling
for
just
one
rate
cut
rather
than
three
in
2024.

It’s
unclear
to
what
extent
Wednesday’s
CPI
news
was
reflected
in
the
latest
Fed
projections.
Chair
Jerome
Powell
mentioned
that
FOMC
members
can
alter
their
forecasts
post-release,
but
“most”
generally
don’t.
The
inflation
projections
imply
a
roughly
2.5%
annualised
core
PCE
inflation
rate
in
the
final
six
months
of
2024,
by
our
estimates.
That
marks
no
progress
compared
with
the
2.5%-2.6%
year-over-year
core
PCE
inflation
rate
likely
for
May.

That’s
too
pessimistic,
in
our
view.
Instead,
we
see
core
PCE
inflation
at
1.7%
annualised
in
the
last
six
months
of
2024,
setting
up
for
a
year-on-year
rate
of
2.4%
in
the
fourth
quarter
of
2024.
If
our
inflation
forecast
plays
out,
the
Fed
should
cut
two
or
three
times
in
2024,
rather
than
just
once.
We
expect
the
first
cut
in
September.

The
Fed
also
upped
its
projections
for
the
longer-run,
or
“neutral,”
estimate
of
the
federal-funds
rate
to
2.8%
from
2.6%
in
March.
For
years,
this
estimate
had
been
anchored
at
2.5%.
FOMC
members
have
gradually
reconsidered
this
estimate
over
the
past
year.
The
neutral
federal-funds
rate
is
a
theoretical
concept
marking
the
interest
rate
that
allows
the
economy
to
grow
in
line
with
its
potential.
In
such
a
state,
both
parts
of
the
Fed’s
dual
mandate
(full
employment
and
2%
inflation)
should
be
fulfilled
in
the
long
run.

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