MNI FED WATCH: Seeking Confidence; Divided Over 1 or 2 Cuts

Federal Reserve officials have pushed back the timing of any possible interest rate cut to later this year after FOMC members raised their expectations for where inflation will end 2024, though Fed Chair Jerome Powell emphasized the forecasts are only a snapshot of a committee's views and that policymakers are maintaining maximum flexibility.

"There's fifteen of the nineteen [policymakers] clustered around one or two" cuts Powell said in a press conference. "I look at all of them as plausible," he said, noting "what everyone agrees on is it's going to be data dependent. No one brings to this or takes away from it that is on the Committee a really strong commitment to a particular rate path."

Powell stressed the need for additional confidence that inflation is returning reliably back to the central bank's 2% target, including "more good data," despite a better-than-expected CPI for May released just ahead of the rate decision.

"Everyone would say that this is very data dependent, and I don't hold it with high confidence. They're not trying to send a strong signal that this is what I think is the right thing," he said. (See MNI INTERVIEW: Fed Set For One Or Two Cuts This Year - Bullard)

The Fed held rates in a range of 5.25% to 5.5% for the seventh consecutive meeting Wednesday, and officials were fairly evenly split between one and two rate cuts later this year. Powell said officials are data-dependent and assessing the economy meeting-by-meeting.

ENCOURAGING CPI

Powell described the lower-than-expected CPI figure released Wednesday as “encouraging," and downplayed the Fed's forecasts for higher inflation as factoring an element of “conservatism." Officials had the opportunity to revise their projections after the release of the new inflation data, Powell said: "What's in the SEP actually does reflect the data that we got today."

Of 19 policymakers, four prefer no easing this year and seven see one cut. Eight officials penciled in two cuts. The median sees one rate cut this year, fewer than the two markets anticipated, and less than the three cuts Fed projections showed in December and March.

"We've 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%," the Fed chair said. "So far this year, the data have not given us that greater confidence."

GOOD RESULTS

Powell stressed that the current stance of policy is restrictive and the economy is slowly rebalancing as desired. Zero officials see another rate hike as their baseline, according to the fresh Fed projections.

Officials expect their preferred inflation gauge to end the year at 2.6%, up two tenths from March forecasts, and they see core PCE inflation of 2.8%. Powell noted that officials do not have "high confidence" in their own inflation forecasts, and added that the lags from market rents will take longer before translating into official inflation statistics. (See MNI INTERVIEW: Lockhart Worries About Fed's Long Last Mile)

"We kind of see what we wanted to see, which was gradual cooling in demand, gradual rebalancing in the labor market, while we continue to make progress on inflation," Powell told reporters. "We’re getting good results here."

Fed policymakers left their year-end unemployment rate projection steady at 4.0%. The unemployment rate edged higher in May to 4.0%. Wages are still running above a sustainable pace, Powell said

"Overall, a broad set of indicators suggest that conditions in the labor market have returned to about where they stood on the eve of the pandemic, relatively tight but not overheated. FOMC participants expect labor market strength to continue," Powell said.

The Fed's estimates of longer-run neutral interest rates again edged higher. The median inched up from 2.56% in March to 2.75% in June. The number of individual dots at 2.50% went from 8 in March to 5 in June. Two of those three shifted to 2.75%, while one went to 3%. (See: MNI POLICY: Lively Debate At Fed Over Possible R-Star Rise)