Fed Holds Interest Rate Steady, Projects Just One Rate Cut This Year

Update, June 12, 2024: This article has been updated to include information from Federal Reserve Chair Jerome Powell's press conference.

As widely expected, the Federal Reserve kept pressure on inflation and the economy by keeping its key fed funds rate at its highest since 2001, but lower rates are on the horizon.

The Federal Open Market Committee (FOMC), the central bank’s policy committee, said Wednesday that it would hold the influential interest rate in a range of 5.25% to 5.5%, where it’s been since last July after a campaign of rapid rate increases from near-zero starting in March 2022. That move was telegraphed by Fed officials well in advance and was anticipated by financial markets.

Fed officials also on average projected cutting the rate by 0.25 percentage points by the end of the year, a much slower pace than the three-quarters of a point cut they anticipated when they last made their quarterly projections in March. 

"We stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%," Federal Reserve Chair Jerome Powell said in a press conference following the policy decision announcement. "So far this year, the data have not given us that greater confidence."

Projections Still Call For Rate Cut, But Fewer Than Before

The outlook for potential rate cuts has shifted over the course of the year with each new bit of economic data.

At first, fed officials and markets were more optimistic about lower rates, projecting as many as six quarter-point rate cuts this year. But that soured this spring after a string of hotter-than-expected inflation reports in the first quarter prompted Fed officials to say they’d keep rates higher for longer to fight price increases.

Two relatively tame inflation reports in a row, including one Wednesday morning, revived hopes for earlier cuts, and many economists were expecting FOMC members to still pencil in one or two by the end of the year.

A lower fed funds rate would be cause for celebration for pretty much anyone who wants to borrow money since rate cuts could help push down credit card interest and mortgage rates from their current levels, which are close to the highest in decades.

Powell, as well as the official statement of the committee, said that progress had been made against inflation but not enough to warrant rate cuts yet.

“Inflation has eased over the past year but remains elevated," The committee said in an official statement. "In recent months, there has been modest further progress toward the Committee's 2% inflation objective."

That language was identical to the statement from the Fed's May meeting other than changing "a lack of" further progress to "modest."

While the Fed holding the fed funds rate flat was widely expected by financial markets, the outlook for rate movements later in the year was much more up in the air. Stocks, which had rallied Wednesday morning after new data showed price increases were lower than expected in May, dipped after the FOMC announcement of just one rate cut being projected.

The projections also suggested that if and when inflation falls to the Fed's goal of a 2% annual rate, the historically low interest rates for loans that prevailed before the pandemic may never return. Fed officials estimated they would set the fed funds rate at a range of 2.75-3% after 2026, up from 2.5-2.75% when they last estimated in March. That compares to the 1%-1.25% range on the eve of the pandemic hitting.

"People are coming to the view that rates are less likely to go down to their pre-pandemic levels," Powell said.