Fed Signals Just One Rate Cut In 2024 (Live Coverage)

The Federal Reserve surprised Wall Street on Wednesday, signaling that just one quarter-point rate cut is likely this year. The hawkish shift was all the more surprising because it came after May’s consumer price index delivered the best inflation news all year. But the S&P 500 and Nasdaq held big pre-Fed gains into record territory due to tame CPI data.

Fed Chair Jerome Powell began his news conference at 2:30 p.m.

Updated: 2:48 p.m.

Fed Rate Projections Did Reflect Today’s CPI

Powell said policymakers had the chance to adjust their rate projection after Wednesday morning’s tame CPI report. He said some Fed officials did but most did not.

Updated: 2:44 p.m.

Fed Inflation Target Conservative

Powell was asked about the Fed’s upwardly revised year-end core PCE target of 2.8% and whether it’s too high, given that the current rate is 2.75%. Powell said some very-low readings late last year will drop out of the 12-month equation.

If we get more good readings like today’s, the Fed forecast will be too high, Powell said. But for now, policymakers are keeping an “element of conservatism.”

If core PCE inflation falls to 2.6% or 2.7%, that would be a good place, Powell said.

Updated: 2:39 p.m.

Fed Rate Projections Aren’t A Plan

Powell said, as usual, that the Fed rate-cut projections aren’t a plan and will shift if the data comes in differently than forecast.

Updated: 2:36 p.m.

Powell Says Labor Markets In ‘Better Balance’

Powell says supply and demand in the labor market “have come into better balance.” Conditions in the labor market are “relatively tight, but not overheated,” like before the pandemic.

Fed Chair Powell noted the cooler CPI reading, which tends to come in a little higher than the Fed’s preferred core PCE inflation reading. But he said the central bank needs more confidence to start cutting rates.

Updated: 2:30 p.m.

Fed Raises Core Inflation Forecast

As far as economic projections, the main change is that the Fed now sees core PCE inflation running at 2.8% in Q4 vs. the year ago period, up from 2.6% in June. Wall Street may have doubts about that projection, which is key to the interest-rate outlook. That’s behind the calm reaction, with the S&P 500 regaining lost ground.

Updated: 2:28 p.m.

Fed Raises Long-Term ‘Neutral’ Rate Again

One more projection is worth noting. Policymakers raised their estimate of the longer-run neutral Fed funds rate to 2.8% from 2.6%. That’s not really a concern for investors, but it’s interesting that it crept higher again after getting nudged up to 2.6% from 2.5% in March.

Updated: 2:24 p.m.

Stock, Bond Rallies Easing Financial Conditions

The Fed is holding rates at a level that Powell has described as “well into restrictive territory.” In other words, interest rates are clearly high enough to be exerting downward pressure on economic growth and inflation.

The Fed’s policy statement indicates that the economy is expanding at “a solid pace,” while “job gains have remained strong.”One view on Wall Street is that Fed interest-rate policy hasn’t worked as expected because financial conditions are too easy.

Indexes of financial conditions compiled by Goldman Sachs and the Chicago Fed that factor in stock prices, borrowing costs, demand for credit and the dollar’s exchange rate show that conditions are no tighter than they were before rate hikes began in March 2022. The AI-led S&P 500 rally is the biggest reason why financial conditions have defied high rates.

Wednesday’s rally in stock and bond markets, along with a drop in the dollar, just made financial conditions even easier. The Fed doesn’t target stock prices directly, but persistent changes in financial conditions can affect policy.

Updated: 2:17 p.m.

Stocks Hold Big Gains Despite Hawkish Surprise

The Nasdaq composite is up 1.9% while the S&P 500 is 1% higher, little changed from pre-Fed levels. The 10-year Treasury yield is at 4.28%, up slightly from about 4.26% before the Fed announcement but still down 11 basis points from Tuesday.

Markets are taking a sanguine view of the Fed outlook because the CPI was so tame. It’s unclear whether any Fed policymakers updated their projections after this morning’s CPI release.

We’ll get a better idea with tomorrow morning’s 8:30 a.m. release of the producer price index of how the Fed’s primary inflation rate, the core PCE price index, will look in May. Some PPI components, including health care services prices and a measure related to airfares, feed directly into the core PCE price index.

Updated: 2:11 p.m.

Four Fed Hawks Want No Change This Year

Here’s another surprise: Fed policymakers weren’t quite as divided as they were in March. This time 11 policymakers expect a need for no more than one rate cut, while eight see two rate cuts as warranted. The majority of 11 included four hawks who prefer to keep policy in place at the current Federal funds target range of 5.25% to 5.5%.

This is a higher-for-longer interest rate outlook, with the Fed’s key rate holding above 4% for the next year and a half.

Updated: 2:05 p.m. ET

Fed Signals Just One Rate Cut In 2024

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Policymakers’ dot-plot projections show the Fed’s benchmark interest rate falling to 5.1% this year, implying 25 basis points in rate cuts.

For 2025, Fed policymakers see a year-end rate of 4.1%, implying four additional quarter-point cuts.

The takeaway, which Fed chair Powell may not acknowledge, is that policymakers must be worried about an AI-fueled stock market melt-up that keeps inflation from heading back to target.

Despite the surprise, markets are hanging pretty tough.

While the stock market rally and the broad easing of financial conditions likely played a role in the hawkish shift, May’s strong jobs report surely played a role.

Updated 1:33 p.m. ET

S&P 500 Soars, Yields Dive Ahead Of Fed Announcement

The S&P 500 and Nasdaq rose sharply to fresh record highs ahead of the Fed announcement following tame May consumer price index data.

The S&P 500 jumped 1% while the Nasdaq composite leapt 1.7%.

The 10-year Treasury yield plunged 13 basis points to 4.27%, hitting its lowest level since April 1.

* * *

The message from markets is that there’s nothing to fear from today’s Fed meeting, and that’s probably right. Fed Chair Jerome Powell, who will take to the podium at 2:30 p.m., has to be pleased by the cooling in inflation, especially services inflation.

Powell has held together a narrow majority of Federal Open Market Committee, or FOMC, members behind a cautiously dovish policy. The updated Fed rate-cut outlook reflects the median of individual projections made by each policymaker. The last batch of projections in March indicated that 10 committee members were forecasting three quarter-point cuts, while nine members saw two rate cuts or fewer.

The new projections are likely to show a similarly narrow majority backing two rate hikes. However, May’s 0.16% rise in the core CPI, the smallest monthly increase since August 2021, could signal the renewal of a disinflationary trend and help build a consensus. Still, Powell will make it clear that one inflation report isn’t nearly enough to give the Fed the confidence it needs to start cutting rates.

Ahead of the Fed update, markets are pricing in 73% odds of a quarter-point rate cut on Sept. 18, up from around 50% before the CPI. Wall Street now sees 72% odds of two quarter-point rate cuts before the end of 2024.

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