It took six months, but the FOMC and the short-term rates markets are finally in alignment with respect to the level of the Fed Funds rate as we approach the second half of 2024. Since the beginning of the year, investors have had to embrace a less-accommodative-than-expected FOMC. The markets “expectation” of six rate cuts has dwindled to the “hope” for just two rate cuts as we approach July. From the central bank’s perspective, the June FOMC meeting provided insight into the committee’s views, with updates to the Summary of Economic Projections and Dot Plot.
The outlook for inflation, growth and employment have been marginally adjusted but still reflect a stable economy with inflation taking longer than anticipated to return to target. As such, the committee’s long-held view of three rate cuts in 2024 has now been reduced to just one rate cut later in the year, with additional reductions coming in 2025. Perhaps, one of the most revealing data points from the June FOMC communication was the move up in long-run interest rates meaning, even after some accommodation, interest rates aren’t returning to pre-COVID levels any time soon.
Overall, the central bank’s assessment of the economy was consistent with past meetings, with some marginal changes. The unemployment rate forecast for the end of2024 was left unchanged at 4.0 percent, which is the level it reached in May. The unemployment-rate forecast for 2025 was raised only slightly to 4.2 percent. Despite, 1Q2024 real GDP growth being revised down to 1.3 percent in the most recent estimate, the median projection left the real GDP outlook unchanged at 2.1 percent for this year and 2.0 percent in 2025. Finally, the median projection now expects core PCE inflation this year at 2.8 percent, reflecting higher-than-expected readings in the first quarter. The 2025 forecasts show headline and core PCE inflation cooling to 2.3 percent, with inflation still returning to the 2.0 percent target in 2026.
A theme for the second half of 2024 will be global central banks starting to ease with the hopes that still-elevated inflation starts to fade. The European Central Bank was the first major central bank to cut rates on June 6th along with Canada, Sweden and Switzerland also easing this year. History generally tells us the FOMC leads with others to follow, so this time around is different. The European Union is still dealing with inflation but taking the stance of getting ahead of any potential issues on the horizon even if data holds up in the short run. Ultimately, it is now safe to say the “higher for longer” narrative has shifted.
