As expected, the US Federal Reserve’s policy committee held benchmark borrowing costs at a 23-year high for a seventh consecutive meeting this afternoon, but slashed the number of cuts expected this year from three to one – disappointing market participants expecting a more dovish outlook. In the statement setting out its decision, the Federal Open Market Committee repeated a sentence warning that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”.

A sentence that previously complained of a “lack of further progress” in reducing price pressures was tweaked to read “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective”.

According to the accompanying “dot plot” Statement of Economic Projections, the benchmark federal funds rate is expected to end 2024 at around 5.1 percent – a level that implies one 25-basis point reduction this year, below the two currently priced into swap curves – before falling to 4.1 percent in 2025. In the previous iteration, rates were expected to hit 4.6 percent in 2024 and 3.9 in 2025 – meaning that officials essentially shifted one of this year’s cuts into next year.

Perhaps most importantly, the long-run projection for the Fed Funds rate climbed to 2.8 percent from 2.6 percent under the previous set of projections – suggesting that policymakers are gradually lifting “neutral rate” estimates as the economy runs hot.

Under the updated forecasts, the core personal consumption expenditure price index is seen rising 2.8 percent this year – up from 2.6 percent in March – and 2.3 percent in 2025, above the 2.2 percent previously estimated. Unemployment is expected to hold at 4 percent by the end of 2024, the same as the previous projection. Growth expectations were also left unchanged, with the economy seen expanding 2.1 percent this year before fading slightly toward 2 percent in 2025.

The decision comes after last month’s consumer price index report – released this morning – came in well below consensus estimates, with core inflation cooling to its weakest pace since mid-2021. Although further clarity will arrive with tomorrow’s producer price index report, market expectations for the May core personal consumption expenditures print have ratcheted down into the 0.15-percent range – hitting levels that would suggest that an early-year inflation acceleration has run its course, with pressures likely to ebb further in the months to come.

Treasury yields are partially reversing this morning’s declines, and the dollar is inching higher, suggesting that market participants are viewing the decision through a very modestly-hawkish lens. Although a clear easing signal is unlikely, Chair Jerome Powell’s performance during the post-decision press conference could play a critical role in helping set expectations for rate cuts in the autumn months. We will be particularly focused on trying to extract a signal from how aggressively he defends the central bank’s independence – if he strenuously asserts the Fed’s capacity to ease policy in the months leading up to the election, odds on a September move should hold firm.