Beijing time early Thursday (13th), the Federal Reserve announced its June interest rate decision. The Federal Open Market Committee (FOMC) unanimously decided to maintain the interest rate range at 5.25%-5.50%.

The Federal Reserve kept its economic outlook unchanged in the Summary of Economic Projections (SEP), raised core inflation and interest rate expectations, and kept employment market expectations basically stable. The much-anticipated dot plot lowered the outlook for rate cuts to 1 time within the year. Federal Reserve Chairman Powell acknowledged progress in inflation but said it was not yet time to announce a rate cut. As a result, U.S. stocks plunged at the end of the day, and the dollar and U.S. Treasury yields rebounded from their lows.

The room for rate cuts within the year has shrunk.

The decision statement said that when considering any adjustments to the target range for the federal funds rate, the committee will carefully assess upcoming data, changing prospects, and the balance of risks. The committee reiterated that it is not appropriate to lower the target range until there is greater confidence in the sustained progress of inflation towards 2%.

Federal Reserve Chairman Powell said at the beginning of the press conference that inflation has eased significantly from its peak but is still too high. "Our economy has made great progress, and the labor market has achieved a better balance with continued strong employment growth and low unemployment rates. We are firmly committed to restoring the inflation rate to the 2% target to support a strong economy that benefits everyone." He added that the Federal Reserve is maintaining its restrictive stance on monetary policy.

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The latest interest rate expectations have changed. The median federal funds rate for 2024 is 5.1%, revised up by 50 basis points from March, corresponding to one rate cut within the year. The median rate for 2025 is 3.9%, revised up by 20 basis points from March, corresponding to four rate cut spaces, and the long-term rate target is revised up by 20 basis points to 2.8%.

The number of committee members who expect to stand pat in 2024 has risen from 2 to 4. All 10 members who originally favored three or more rate cuts have "switched sides". Now, 8 support two rate cuts, and 9 support one rate cut. For 2025, 9 members expect the rate range to be between 4.00% and 4.25%, becoming the most popular option.

Even after the Consumer Price Index (CPI) for May on Wednesday was lower than expected, Powell believes there are still no conditions to start cutting rates, and the committee has incorporated the data into its economic forecasts. He said, "We believe today's report is progress and is building confidence. But we don't think we have the confidence to start easing policy at this time."

However, he also emphasized that although the possibility has not been ruled out, no one on the committee considers continued rate hikes as the base scenario.

Strong employment and rising inflation forecastsThe resolution statement indicated that economic activity continues to expand at a steady pace. Job growth remains robust, and the unemployment rate is low. Inflation has eased over the past year but is still rising. In recent months, the committee has made moderate further progress towards achieving the 2% inflation target.

In the latest Summary of Economic Projections (SEP) released, the Federal Reserve maintained its previous GDP forecast, with an economic growth rate of 2.1% for 2024, 2.0% for 2025 and 2026, and a long-term growth rate of 1.8%.

The Federal Reserve remains highly attentive to inflation risks, raising forecasts again after March. The core PCE growth rate for 2024 was revised up by 0.2 percentage points to 2.8%, and for 2025 it was revised up by 0.1 basis points to 2.3%, with the 2026 growth rate remaining unchanged at 2.0%. The overall PCE adjustments were similar, with the 2024 PCE revised up by 0.2 percentage points to 2.6%, the 2025 PCE revised up by 0.1 percentage points to 2.3%, and the 2026 and long-term PCE maintained at 2.0%.

Powell believes that the recent series of inflation data show signs of cooling price pressures. "The inflation data received earlier on Wednesday was higher than expected, although the latest monthly data has eased. Long-term inflation expectations seem to have taken hold." However, the Federal Reserve Chairman emphasized, "We need to see more good data to strengthen our confidence that inflation is moving sustainably towards 2%."

The job market will remain resilient this year. The Federal Reserve expects an unemployment rate of 4.0% for 2024, unchanged from March. For 2025 and 2026, it was revised up by 0.1 percentage points to 4.2% and 4.1%, respectively, with the long-term unemployment rate at 4.2%.

Powell stated that the recent strong employment data may be slightly "exaggerated," indicating that benchmark revisions are underway, while wage growth is still above sustainable levels, and achieving a 2% inflation rate may require lower wage growth. "There is a view that the data may be a bit too good. In fact, the job market remains very strong, and we are seeing a gradual cooling, gradually moving towards a better balance," he commented.

September or November

For the Federal Reserve, the next step in cutting interest rates is hindered by the lack of consistency in the direction of economic data. For example, the U.S. manufacturing industry has fallen into a slump again, high mortgage interest rates have suppressed demand in the real estate sector, and there have been fluctuations in employment performance in private and household surveys. However, the rapid rebound in the May services PMI and the stabilization and rise in the consumer confidence index are expected to help accelerate economic growth.

BMO Capital Markets Senior Economist Sal Guatieri said in an interview with journalists that although inflation has finally shown signs of calming, the Federal Reserve's caution is understandable. The strong growth in soaring service prices, including necessities such as auto insurance, electricity, and natural gas, combined with the strong growth in discretionary items such as entertainment services and hotel costs, has become a booster for prices. Overall, he believes that the current core inflation level is a bit hot for the Federal Reserve.

Federal funds rate futures show that the probability of a rate cut in September approached 70% after the CPI announcement, and fell back to around 60% after Powell's press conference, once again pointing to November.Guatelli told reporters that only a substantial easing of labor market conditions and a resumption of a downward trend in inflation could raise the possibility of a rate cut in September. This means that from now on, economic data during the period leading up to the Jackson Hole conference will be particularly important.

LPL Financial analyst Quincy Krosby said that the Fed's latest interest rate decision is likely because it does not want to cause unnecessary easing of financial conditions, as the data-dependent Fed needs a series of relatively weak inflation reports before it can start a rate-cutting cycle.

Goldman Sachs believes that the timing of the first cut is a conundrum for the Fed. "First, we continue to believe that rate cuts are optional but with limited urgency. Second, by September, inflation may have improved significantly, but it will still not be perfect, making rate cuts not an obvious decision. Some Federal Open Market Committee participants still seem more concerned about inflation and less willing to cut rates."