Fed to Keep Rates Higher Even Longer; CU Economists Still See Chance for Cuts Soon

CU trade economists think another good inflation report or two might convince the Fed to lower rates twice this year.

By Jim DuPlessis | June 12, 2024 at 04:11 PM Fed Chair Jerome Powell speaks at a news conference in Washington, D.C., Wednesday afternoon.

The Fed kicked the can down the road Wednesday, keeping rates at their current high level and signaling that it will take more time in reducing them.

The Federal Open Market Committee (FOMC) ended its two-day meeting Wednesday with a decision to maintain the federal funds rate at 5.25% to 5.50%. Its projection report showed half of FOMC members expect the rate to fall to 5.1% by year's end, indicating one 25-basis-point rate cut this year. In March, the median expectation was for two rate cuts.

Fed Chair Jerome Powell said half of members expect rates will fall to 3.1% by end of 2026. The FOMC's four remaining meetings this year are July 30-31, Sept. 17-18, Nov. 6-7 and Dec. 17-18.

"Cuts that might have taken place this year might take place next year," he said.

Powell said rates won't fall until committee members are confident inflation is falling to its 2% goal. He said members had a chance to change their projections after the U.S. Bureau of Labor Statistics issued a report Wednesday morning showing no inflation in May. While it added to confidence inflation is falling, it wasn't enough to tip the balance to a rate cut.

"Today's inflation report was encouraging, but it comes after several reports that were not encouraging," Powell said. "Inflationary pressures have come down, but we're still getting high inflation readings."

"We're in the phase now of just sticking with it until we get the job done," he said.

The BLS's Consumer Price Index showed no change from April to May after seasonal adjustments. Over the past 12 months, inflation for all goods rose 3.3%, down from 3.4% in April.

Inflation excluding food and energy rose 0.2% in May, after rising 0.3% in April and 0.4% per month in January, February and March.

On June 7, BLS reported the nation added 272,000 jobs from April to May, while unemployment rose to 4.0%, up from 3.7% a year earlier and 3.9% in April.

Before the meeting, Dawit Kebede, senior economist for America's Credit Unions, said he thought another good inflation report, like the one Wednesday morning, might convince the FOMC to cut rates at least twice this year. Curt Long, the trade group's deputy chief economist, stuck with that prediction after the Fed's announcement.

Curt Long

"Another month of encouraging inflation data would put two rate cuts during this calendar year squarely on the table," Long said.

Kebede said both headline and core inflation rose less than anticipated compared to prices a year ago. "Inflation cooled down in May following four consecutive months of high readings," he said.

Dawit Kebede

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said the FOMC projection report showed members were closely divided between one and two cuts this year.

"The tight job market — highlighted again in May's employment data — is likely leading many members to continue to be cautious about cutting rates before inflation is consistently lower, Fratantoni said.

The MBA's weekly applications report released Wednesday showed the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $766,550 or less fell from 7.07% on May 31 to 7.02% June 7.

Fratantoni said the Fed's latest signals on rate cuts doesn't change the MBA's forecast for mortgage rates. "We still look for mortgage rates to drop to about 6.5% by the end of 2024."

The CPI hit a high of 9.1% in June 2022, and fell to recent lows of 3.1% in November 2023 and January this year.

The price index rose 0.1% for food and fell 2.0% for energy from April to May. The 12-month inflation rates are 2.1% for food and 4.0% for energy.

Prices rose 0.6% for used cars and fell 0.5% for new cars from April to May. Over the past 12 months, prices fell 9.3% for used cars and 0.8% for new cars.