FOMC verdict: not just yet

As expected, the US Federal Reserve today kept its funds target unchanged at 5.25-5.5 percent.  The media release offers some cautious hints that the start of an easing cycle may not be too far in the future. It once again describes current inflation as "elevated", but notes that "there has been further modest progress toward the Committee's 2 percent inflation objective".  Further, "the Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year".

All of that being said, the release goes on to repeat that "The Committee does not believe it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent". We can get further insight into just what this means for the timing of rate cuts from the latest "dot plot", released as part of the Fed's updated economic projections. It appears that four FOMC participants now expect no rate cuts in 2024, with the remainder (i.e. the majority) looking for one or two 25 basis point reductions.  There is still one lonely holdout expecting no rate reduction during 2025, but the consensus appears to call for rates at the end of next year to be 100 basis points below the current level.

Earlier today, the Bureau of Labor Statistics released CPI data for May, which came in marginally below market expectations. Headline CPI was unchanged in the month, bringing the year-on-year change to 3.3 percent, while CPI ex food and energy rose 0.2 percent in the month for a year-on-year gain of 3.4 percent. Markets reacted very positively to the data and are once again pricing in the possibility of a Fed rate cut as early as September. However, today's numbers are still well above the 2 percent target, and there is little in today's report to change the Fed's judgment that progress back towards that target will be gradual -- a fact that the wording of the FOMC media release and the dot plot clearly underscore. It is all tediously data-dependent, and likely to remain that way for several more months until the inflation picture becomes much clearer.