As widely anticipated, the Federal Open Market Committee (FOMC) voted to leave the Federal funds rate unchanged at a target range of 5.25%-5.50%. The statement was largely unchanged though did acknowledge that inflation has seen “modest further progress”, a slight improvement from “lack of further progress” at its May meeting. The committee likely quickly penciled this in following the May CPI report which showed broad cooling in price pressures.

Updates to the Summary of Economic Projections (SEP) were also largely uneventful though the biggest surprise came with the Fed dot plot:

• Real GDP growth projections was unchanged. 
• Unemployment rate projections were nudged higher by 0.1% in 2025 and 2026.
• Both headline and core PCE projections were raised 0.2% to 2.6% and 2.8% in 2024 and by 0.1% in 2025 to 2.3%, before normalizing to 2.0% by the fourth quarter of 2026. 
• Median policy rate projections (dot plot) shifted to signaling just one rate cut this year, down from three rate cuts at its March meeting. Long run Fed funds rate projection was also raised to 2.8% from 2.6%.

Specifically, 4 officials are penciling in zero cuts, 7 are forecasting a single cut, and 8 are projecting two cuts this year. While this shift may be perceived as hawkish, the median estimate for rate cuts next year increased to four from three cuts previously. 

In the May CPI report, year-over-year headline inflation cooled to 3.3% from 3.4% - down one decimal. The median FOMC rate forecast –dot— for 2024 moved higher by half a percent. It’s difficult to square this circle other than the committee views inflation will remain stubbornly sticky through this year and are not confident enough in one inflation print, even though incoming data suggest improvement.

At the press conference, it seemed Chairman Powell continued to emphasize the uncertainty around the SEP and that the rate outlook will remain largely data dependent, perhaps dampening any perceived hawkishness. That said, the committee appears curiously still concerned with the inflation outlook but remains confident in resilient growth and tight labor markets.

Market reaction was somewhat mixed following a rally after this morning’s CPI print; equites held onto their gains while yields edged higher after falling early in trading. Our base case view hasn’t changed, we continue to expect the Fed to reduce rates 1-2 times this year though the committee seems to be prepared to do less rather than more.

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