FOMC leaves rates alone but scales back 2024 easing outlook

(Reuters) -The Federal Reserve held interest rates steady on Wednesday and pushed out the start of rate cuts to perhaps as late as December, with officials projecting only a single quarter-percentage-point reduction for the year amid rising estimates for what it will take to keep inflation in check.

The mark down in the outlook for rate cuts, from three quarter-percentage-point reductions seen in the Fed's March projections, was made despite the central bank's acknowledgement in its new policy statement of "modest further progress" towards its 2% inflation target - an upgrade from its May 1 statement.

Federal Reserve Chairman Jerome Powell said at a press conference after the announcement that a single quarter-percentage-point rate cut by itself wouldn’t have a big impact on the U.S. economy, with the path of policy being the more important focus. Forecasts released by officials on inflation are “conservative” in nature, he said.

STORY STATEMENT SUMMARY OF ECONOMIC PROJECTIONS

MARKET REACTION:

STOCKS: The S&P 500 extended a rally to up 1.29%

BONDS: The yield on benchmark U.S. 10-year notes ticked higher but was still down sharply on the day at 4.304%. Likewise, the 2-year note yield was still down sharply at 4.75%

FOREX: The dollar index was off 0.58% with the euro up 0.69%

COMMENTS:

BILL ADAMS, CHIEF ECONOMIST, COMERICA BANK, DALLAS (emailed)

"Importantly, the balance of opinion in the Dot Plot doesn’t necessarily reflect how the FOMC will vote between now and the end of the year. All of the regional Fed presidents have a dot in the dot plot, but only a handful of them vote in FOMC decisions. Most of the votes are cast by the Federal Reserve Board governors, who tend to be more receptive to the idea of cutting rates. That suggests a majority of voting FOMC members probably think two rate cuts are most likely appropriate before year-end.

"At the same time, that majority wouldn’t feel obligated to follow through with cuts if economic data come in differently than they project. The FOMC’s members emphasize over and over again that they will make monetary decisions meeting by meeting in reaction to incoming data.

"In short, the Fed made their decision-making process fairly clear coming into today’s meeting, and their policymakers are reacting to incoming data in a manner that is consistent with that process. If inflation continues to moderate, as has been the trend over the last year and a half, the Fed will start to cut interest rates in the second half of 2024."

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA (emailed)

"The Fed statement, while acknowledging that inflation is moving towards the Fed's 2% target nonetheless was muted in terms of suggesting the Fed is similarly moving closer toward easing monetary policy.

"This is most likely a function of not wanting to ease financial conditions unnecessarily as the data dependent Fed requires a series of cooler inflation reports before initiating a rate easing cycle."

CHRIS LOW, CHIEF ECONOMIST, FHN FINANCIAL, NEW YORK (emailed)

"Bottom line: There’s a lot of encouragement here for those hoping for rate cuts, but the dot plot stands out as much as anything. It suggests it is too soon to get too excited about cuts. This morning’s May CPI release was great news, but the one cut, maybe two cuts, now implied by the 2024 dots is a reminder we need several more reports like May’s before the Fed will be comfortable cutting rates."

NATE THOOFT, CHIEF INVESTMENT OFFICER AND SENIOR PORTFOLIO MANAGER, MULTI-ASSET SOLUTIONS TEAM, MANULIFE INVESTMENT MANAGEMENT, BOSTON (emailed)

"The biggest takeaway of the meeting surrounded the change in the dot-plot moving from three 25bps cuts to one for the remainder of 2024. While one is the median projection it was a close a call on votes between 1 or 2 in 2024. And 2025 saw a median increase to four cuts from three previously. The net impact to the next 18 months being a reduction of one less 25bps cut.

"Modest adjustments to raise both inflation estimates, and unemployment rate projections were also notable and necessary modifications to support the reduction of cuts projected in the dot-plot."

MIKE WILSON, CHIEF INVESTMENT OFFICER, MORGAN STANLEY, NEW YORK (on Reuters Global Markets Forum)

"(Fed) generally in line. Maybe a bit disappointment relative to CPI release which they didn't have before dots were constructed.

"I think we are on a downward trajectory at this point given the lag with M2 growth ... it's well defined now. However, I think they may be surprised on the growth front where data has been weaker this year."

GREG MCBRIDE, CHIEF FINANCIAL ANALYST, BANKRATE (emailed)

“The May CPI released Wednesday morning is the type of inflation report we need to see more of in the months to come. The only hint of acknowledgement in the Fed statement was the note of ‘modest’ progress – rather than a ‘lack of’ noted in March – toward the 2 percent inflation objective.”

GENE GOLDMAN, CHIEF INVESTMENT OFFICER, CETERA INVESTMENT MANAGEMENT, LOS ANGELES, CA

"The Fed is acting like a CEO sandbagging rate cut expectations down to one or two cut, but likely going to beat them later this year with two or more. The reason is that inflation is rolling over pretty quickly. "

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

“The policy statement was mildly more dovish than the previous one. Today’s decent CPI reading helped. The dot plot is probably more important than the policy statement. The Fed shifted from three cuts down to one, but they added a cut to 2025. The net effect is to remove one cut over the next 18 months, which probably won’t matter much to the broader economy. The market cares more than the economy does about whether there are two cuts this year or only one. A difference of a few months or a few basis points won’t affect most people’s lives. The Fed basically is basically rearranging the rate cut deck chairs.

"It stretches credulity to think that we will end 2024 with 4.0% unemployment when we’re already there and we’re half-way through the year.

"The increase in the ‘neutral’ federal funds rate—the longer-run projection—is notable. Instead of thinking cash yields will move below 3%, now maybe people should start planning on cash earning more than 3%. The real yields from cash could be higher than originally thought.”

(Compiled by the Global Finance & Markets Breaking News team)