“Uncertainties” rule. Wait-and-see amid inflation fears and slowing growth.
By Wolf Richter for WOLF STREET.
The FOMC voted unanimously today to keep the Fed’s five policy rates unchanged, for the fourth meeting in a row, after cutting by 100 basis points in 2024.
- Target range for the federal funds rate: 4.25-4.50%.
- Interest it pays the banks on reserves: 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.25%
- Interest it charges on overnight Repos at its Standing Repo Facility: 4.50%.
- Interest it charges banks to borrow at the “Discount Window” at 4.50%.
The “dot plot” shifts more hawkish.
Via the “dot plot,” the FOMC communicated that participants see only two rate cuts in 2025, same as at the March meeting, with a slightly further hawkish shift: 7 of the 19 participants see no cut at all in 2025, up from 4 in March, and another 2 participants see only one cut, down from 4.
In other words, 9 of the 19 members see no or one cut, one more than in March. The median projection is now only one participant away from seeing just one cut in 2025.
Today’s meeting was one of the four per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plot.” The prior SEP came out at the March meeting. The SEP is one of the ways with which the Fed tries to communicate to the public what its thoughts are about the future of the economy, the labor market, inflation, and monetary policy – given the state of today’s economy. If something changes, the Fed reacts, and the prior dot plot goes out the window, and adios.
For the SEP, each of the 19 participants jots down where they see the Fed’s policy rates, unemployment rates, GDP growth, and PCE inflation by the end of the current year and by the end of each of the next several years. The median value of these projections becomes the headline “median projection” for that metric.
Projections in the SEP are neither decisions nor commitments. Members change their projections as the economic situation changes.
Higher interest rates for longer. Today’s median projection for the end of 2025 remained at 3.875%, same as in March, so only 2 cuts of 25 basis points each in 2025, reflecting the Fed’s efforts to grapple with the “uncertainties” – a word that is now standard and plentiful in every Fed communication, from Powell on down.
But there was a shift to no-or-one cut: 7 participants see no cut at all in 2025, up from 4 in March, and 2 participants see only one cut, down from 4. So the the total seeing no or one cut rose to 9 participants. One more participant in that group would lower the median projection to just one cut.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
7 see 4.375%: No cuts
2 see 4.125%: 1 cut of 25 basis points
8 see 3.875%: 2 cuts of 25 basis points
2 see 3.625%: 3 cuts of 25 basis points.
Higher forever? The “longer-run” federal funds rate: The median projection for the “longer-run” federal funds rate in 2028 and beyond remained at 3.0%, same as in the SEPs in March and December, and up from 2.9% in September, 2.8% in June, and 2.6% in March last year.
In other words, in 2028 and beyond, the Fed sees the midpoint of the federal funds rate (3.0%) to be 1 percentage point higher than PCE inflation rate (2.0%).
Inflation projections rose further:
- Headline PCE inflation by the end of 2025 jumped to 3.0% (from 2.7% in the March SEP and from 2.5% in the December SEP). The most recent headline PCE price index (for April) was 2.5%.
- “Core PCE” inflation by the end of 2025 jumped to 3.1% (from 2.8% in the March SEP and 2.5% in the December SEP. The most recent actual core PCE price index (for April) was 2.1%.
- Hitting the 2.0% inflation target got moved out to 2028 (from 2027 in the March SEP).
GDP growth projections gets ratcheted down further: The median projection for real GDP growth for 2025 declined to 1.4%, from 1.7% in the March SEP, and from 2.1% in the December SEP.
And the median projections for 2026 GDP growth declined to 1.6%, from 1.8% at the March SEP (2% is the 15-year average real GDP growth of the US).
Unemployment rate gets ratcheted up further: The median projection for the unemployment rate at the end of 2025 rose to 4.5% (up from 4.4% at the March SEP). In May, the unemployment rate was 4.2%. These are still historically low unemployment rates, and the projected differences are minor, but the trend is higher.
Three phrases changed in the FOMC’s statement:
New: “The unemployment rate remains low….”
Old: “The unemployment rate has stabilized at a low level in recent months….”
New: “Uncertainty about the economic outlook has diminished but remains elevated.”
Old: “Uncertainty about the economic outlook has increased further.”
New: “The Committee is attentive to the risks to both sides of its dual mandate.”
Old: “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen..”
The whole statement:
“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; Alberto G. Musalem; Jeffrey R. Schmid; and Christopher J. Waller.”
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The post Fed Sees Hotter Inflation for Longer, Higher Unemployment, Slower Growth, “Dot Plot” Shifts More Hawkish but still Sees 2 Cuts in 2025. QT Continues appeared first on Energy News Beat.