The Fed expects to cut rates just once this year

Stocks ended the day mixed Wednesday as investors parsed a key inflation report and the Federal Reserve's latest projections for interest rate cuts this year.

The Dow fell 35 points, or 0.1%. The S&P 500 gained 0.9% and the Nasdaq Composite jumped 1.5%, reaching record-high closes for the third consecutive day.

Investors cheered the May Consumer Price Index report, which showed that inflation cooled at a slower pace than expected last month. Consumer prices rose 3.3% from the prior year, a slower clip than April’s 3.4% rate, according to the Bureau of Labor Statistics. On a monthly basis, prices were unchanged, slowing from April’s 0.3% gain.

The Fed on Wednesday afternoon held rates steady as expected, but signaled that it now expects to cut rates just once in 2024 rather than the three times it had previously forecast.

Fed Chair Jerome Powell reiterated at the post-meeting press conference that the central bank will not cut rates until it sees more data showing that inflation is cooling.

As stocks settle after the trading day, levels might change slightly.

Federal Reserve Chair Jerome Powell said Wednesday's Consumer Price Index data showing inflation cooled to 3.3% last month from 3.4% in April is "encouraging."

But Powell isn't in full celebratory mode.

That's because the report "comes after several reports that were not so encouraging." Officials were caught off guard in March when CPI jumped to 3.5% from 3.2% in February, marking the biggest one-month acceleration in half a year. That, along with other inflation data, caused officials to reconsider how many rate cuts would be merited this year.

Powell declined to answer whether the new data pushes up the timetable for a potential rate cut.

"Certainly, more good inflation readings will help with that," he said in a post-meeting press conference on Wednesday afternoon. But he cautioned that inflation data is just one piece of the puzzle and the decision to cut rates will be based on the "totality" of economic data.

People carrying variable-rate debt like credit cards and those seeking a loan won’t be happy given that the Federal Reserve’s benchmark lending rate rate, which directly and indirectly affects consumers’ borrowing costs, remains at a 23-year high.

Those rates will likely stay high for a while, since central bankers’ latest summary of economic projections shows just one rate cut is likely this year. And when that cut does come, it's likely to be small.

“Absent a complete about-face from the economy, interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers. Utilize zero-percent credit card balance transfer offers, shop around for lower fixed-rate personal loans and home equity loans, and channel as much income as possible toward paying down this debt as quickly as possible,” said Greg McBride, Bankrate.com’s chief financial analyst.

But the Fed’s decision leaves savers, once again, in the catbird seat when it comes to making money on their money.

Read more here.

Federal Reserve officials believe there’s a Goldilocks interest rate out there. One that isn’t so low that it ushers in inflation, yet not so high that it tips the economy into a recession. Officials refer to this as r-star or the "neutral rate of interest."

In theory, that perfect rate exists in the real world. And it’s likely the missing puzzle piece needed for the Fed to achieve a soft landing, where inflation is tamed but a recession is avoided.

Fed officials now seem to believe the neutral rate is higher in the long run than they anticipated, whereas rates before the pandemic were "very low" historically, Fed Chair Jerome Powell told reporters.

"Ultimately we think that things like the neutral rate are driven by longer run, slow-moving forces," Powell said on Wednesday. "There's a really good question about whether those really have changed or whether instead rates and the economy are experiencing a series of persistent but ultimately temporary shocks."

Fed Chair Jerome Powell has been wanting to see the US labor market get into a "better balance" for quite some time now.

It looks like he's getting his wish. The job market is starting to resemble its pre-pandemic state, the Fed chief said Wednesday.

Reading from his prepared remarks, Powell rattled off a series of employment data: payroll gains averaging 218,000 per month in April and May; unemployment having crept up but remaining low at 4%; job creation driven by increases in participation among prime-aged workers and immigrants; slower wage growth; and a narrower jobs-to-workers ratio.

"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," Powell said.

During his post-meeting press conference, Powell said the Fed continues to keep a close eye on the labor market.

"We see gradual cooling, gradual moving toward a better balance," he said. "We're monitoring it carefully for signs of something more than that, but we really don't see that."

Here's what Wall Street has to say after the Federal Reserve signaled Wednesday that it will cut rates just once in 2024:

• "It seems that, with the new dot plot [central bankers' economic projections], the committee is eager to prevent financial conditions from loosening further, which would risk another resurgence in inflation. There is no question, however, that with four policymakers opting for no cuts this year, there is a formidable contingent of the FOMC that is very concerned about the inflation backdrop," said Seema Shah, chief global strategist at Principal Asset Management.
• "The first and second paragraphs of the Fed statement tell a clear story: Inflation is stable, but the economy is strong. We're on the fence but in no way committed to cutting rates too soon. The 2024 cut priced in the market remains a coin flip, which will be likely decided by inflation in Q3," said Giuseppe Sette, president of Toggle AI.
• "We stick with our base case of two cuts starting September, premised on the notion the May CPI release is the start of a sustained downshift in inflation. But the dot-plot underlines this is nowhere near a done-deal," said Evercore ISI strategists.
• "Tomorrow’s [Producer Price Index] report could be a pivotal moment. If the report is encouraging and positively influences the Fed's preferred PCE metric, it could shift their stance," said Ken Tjonasam, portfolio strategist at Global X.

Federal Reserve officials are now predicting just one rate cut for the year as opposed to the three cuts they predicted back in March and at the end of last year.

The Fed doesn't target one specific interest rate. Rather it targets a range of interest rates through what's known as the federal funds rate, which in turn influences the interest rates we pay on all kinds of debt.

Currently, the Fed is targeting a range between 5.25-5.5%, the highest level in 23 years. A 25-point cut would lower the target range to between 5-5.25%.

At the height of the pandemic, the Fed targeted a range between 0-0.25%, the lowest it had been since the Great Recession. It wasn't until March 2022 that Fed officials voted to raise the target range to 0.25-0.5%. By the end of 2022, the range was between 4.25-4.5% after officials authorized a series of steep hikes to rein in inflation.

Wall Street’s best bet for the first rate cut is currently September, according to futures, and those odds improved markedly after the release of the May CPI. For that to happen, however, inflation will have to continue to drift lower in the coming months.

Officials frequently emphasize that they are “data dependent” and make conclusions about the economy after data stretching over several months reveal a trend. It’s unclear if the factors that resulted in hotter-than-expected inflation readings earlier this year are still lurking in the background, but the May CPI provided some relief.

Federal Reserve Chair Jerome Powell will likely field questions about rate cut timing in his post-meeting press conference, scheduled for 2:30 pm ET.

The Dow inched lower on Wednesday after the Federal Reserve held interest rates on hold and signaled it expects one rate cut in 2024.

The Dow fell 14 points, or 0.04%. The S&P 500 gained 0.8% and the Nasdaq Composite added 1.6%.

The Fed previously forecasted three quarter-point rate cuts this year. But signs of sticky inflation and a still-hot labor market have put those cuts on the backburner.

Still, investors were cheered on Wednesday by a cooler-than-expected May Consumer Price Index report, which showed that inflation slowed more than expected last month.