The Fed Holds Rates ...

The Federal Open Market Committee (FOMC) decided to maintain the federal funds rate at its current level of 5.25%-5.5% at the June 2024 meeting. The decision reflects the Federal Reserve's cautious approach as it continues to monitor inflation and economic activity. Despite some signs of easing inflation, the Fed remains vigilant, emphasizing the need for "modest further progress" toward the 2% inflation target before considering significant rate cuts.

Inflation has shown signs of cooling, with the Consumer Price Index (CPI) for May at 3.3%  down from 3.4% in April. However, core inflation at 3.4% remains a concern. Producer prices index eased to 2.2% last month, from 2.3% in April. Core prices, excluding food an energy held at 3.2%. The Fed is looking for more evidence of consistent data moving to target, before making any substantial policy changes.

The Fed's decision to hold rates steady comes amid a robust economic backdrop, with strong job gains and low unemployment rates. Growth in the first quarter was up 2.9% year on year. Jobs growth in May was "very strong" with an increase of 272,000 jobs. 

In contrast, the unemployment rate increased to 4.0% in May from 3.9% prior month. Then, new weekly filings for jobless claims, unexpectedly spiked to 242,000 this week, a ten-month high, raising concerns about growth in the rest of the year. 

No wonder, the central bank remains wary of prematurely easing policy, which could risk reigniting inflation. Fed Chair Jerome Powell and other officials have indicated a preference for a "go-slow" approach to rate cuts, emphasizing the need for more data to ensure inflation is on a sustained downward path.

The FOMC's latest 'Blue dot" projections suggest only one rate cut is likely before the end of the year, a reduction from earlier expectations of multiple cuts.

While the FOMC has left the door open for potential rate cuts later in the year, the likelihood of significant easing remains low unless there is clear and sustained progress in reducing inflation. The Fed's cautious stance underscores its commitment to achieving long-term price stability before making any substantial policy shifts. Markets now expect just one cut this year, it could be as late as December. We would still consider two cuts a possibility, those blue dots do bounce about ...