Fed keeps rates steady, but sees just one cut for this year in hawkish surprise By Investing.com

Investing.com — The Federal Reserve kept interest rates unchanged on Wednesday, but in a hawkish surprise the central bank now sees just one rate cut for the year, as inflation is expected to trend higher than previously expected.

The Federal Open Market Committee, the FOMC, kept its in a range of 5.25% to 5.5%.

While the unchanged decision, the eighth in a row, was largely expected, Fed members now believe that fewer rate cuts are needed this year.

Fed members now see the benchmark rate falling to 5.1% this year, suggesting just one rate cut in 2024, compared with a prior estimate in March for three cuts. In 2025, Fed members see the rates falling to 4.1%, up from a prior forecast for 3.9%, before eventually declining to 3.1% in 2026.

“The shifts in the projections of the Fed’s SEP are more hawkish than we anticipated,” Economists at Jefferies said in a Wednesday note following the decision. 

In a sign that members are worried about whether policy will be restrictive in the long run, the Fed lifted its forecast on the neutral rate, one that neither stimulates nor restricts economic growth, to 2.8% from 2.6% previously. 

The path to fewer expected rate cuts for the year come as the central bank lifted its forecasts on inflation.

The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is forecast to be 2.8% in 2024, up from a prior forecast of 2.6%. For 2025, inflation is estimated to be 2.3%, up from 2.2% previously. 

The stickier outlook on inflation wasn’t accompanied by expectations for stronger economic growth as central bank members left gross domestic product, or GDP, forecasts unchanged at 2.1% for this year and 2% for the next. 

On the labor market, meanwhile, unemployment rate seen at 4% this year, unchanged from a prior forecast in March, but is now expected to pick up pace to 4.2% next year, up 0.1% from a prior projection of 4.1%.

Stocks were largely unchanged on the news, with hovering near record levels as data earlier in the day showing consumer inflation slowed more than expected, buoyed optimism that the disinflation trend remains on track.