The Fed is keeping interest rates steady and forecasts only one cut this year

Federal Reserve officials left interest rates unchanged at their highest level Meeting in June on Wednesday and predicted that they reduce borrowing costs only once before the end of 2024, taking a cautious approach as they try to avoid a premature victory over inflation.

Although the Fed was expected to leave rates unchanged, the forecast for interest rate developments surprised many economists.

When Fed officials last released their quarterly economic estimates in March, they expected to cut rates three times this year. Investors had expected to revise that outlook somewhat this time around, in light of persistent inflation in early 2024, but the shift to a single cut was more dramatic.

Jerome H. Powell, the Fed chairman, made clear at a news conference after the meeting that officials were taking a cautious and conservative approach after months of bumpy inflation numbers.

With price increases proving volatile and the labor market remaining resilient, policymakers believe they have the leeway to keep interest rates stable and ensure they completely eradicate inflation without putting too much risk to the economy. But the Fed chairman also suggested that more rate cuts could be possible depending on economic data.

“Fortunately, we have a strong economy and the ability to approach this issue carefully – and we will do so carefully,” Mr. Powell said. He added that “we are closely monitoring downside economic risks, should they materialize.”

Fed officials quickly raised interest rates to a more than two-decade high of 5.3 percent between early 2022 and July of last year. They have held them there ever since, hoping that higher borrowing costs will slow consumer and business demand enough to wrestle price increases back to a normal pace.

Initially, the plan went beautifully, with inflation slowing steadily through 2023, so much so that Fed officials entered 2024 expecting to cut rates substantially. But then price increases proved surprisingly persistent for several months — and policymakers had to delay plans to cut rates, fearing they would lower borrowing costs too early.

The risk of cutting too early is that “we could end up undoing a lot of the good we’ve done,” Powell explained Wednesday.

Now the inflation picture is changing again. New consumer price index data on Wednesday suggested that inflation stickiness in early 2024 was a speed bump rather than a change in trend: price increases cooled noticeably and broadly in May.

Still, it will be late in the year for the Fed to implement the three interest rate cuts it expected in March. And mr. Powell made clear that officials wanted to see more encouraging inflation reports before cutting borrowing costs.

“Lectures like today are a step in the right direction,” he said. “But it’s just one lecture. You don’t want to get too motivated by a single data point.”

If officials make just one cut before the end of the year, their policy rate will be 5.1 percent. Policymakers gave no clear hint about when the rate cut might come. They are meeting four more times this year: in July, September, November and December.

For American families, the Fed’s more cautious approach could mean that mortgage rates, credit card rates and car loan rates remain high for longer. But Mr. Powell emphasized that inflation is also painful for households and that the Fed’s goal is to clamp down on rapid price increases.

For President Biden, an extended period of high interest rates could mean a less powerful economy heading into the November elections. The White House avoids talking about Fed policy because the central bank sets interest rates independently, allowing officials to make challenging decisions without bowing to short-term political pressure. But some Democrats in Congress are loudly calling for rate cuts, and sitting presidents generally prefer lower interest rates.

Biden has at times almost spoken out on Fed policy but has avoided putting outright pressure on the Fed.

On the other hand, the presidential candidate who wins could benefit from a steeper rate cut next year: Although Fed officials predicted fewer rate cuts in 2024, they indicated they could cut rates four times in 2025, up from three times earlier.

The Fed’s forecasts also showed that officials expect inflation to be more persistent in 2024 than they had previously expected: headline inflation could end the year at 2.6 percent, they predicted, up from 2.4 percent in their previous estimate. Mr. Powell suggested the Fed’s inflation forecasts were “conservative.”

He also made clear that the Fed’s forecasts were not a set-in-stone plan. If inflation falls or the labor market takes an unexpected turn toward weakness, the Fed could respond by cutting rates.

“We don’t think it will be appropriate to ease policy until we have more confidence that inflation is coming down,” Powell said, or unless there is an “unexpected deterioration” in the labor market.

For now, the economy remains resilient and the Fed has only one meeting this summer, in July. Few investors expect any movement.

“I think this puts interest rates into a pattern that will last longer,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.