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Fed Says Inflation and Rates are Higher for Longer

June 14, 2024

This past week the Federal Reserve decided not to cut rates and shared their updated forecast on the economy. Let's discuss what was said and what's ahead for the upcoming week.

Higher for Longer Continues

The Federal Reserve met last Wednesday and once again decided to make no change to interest rates. The markets widely expected this, but what caught many off guard was the Fed's updated summary of economic projections.

This is where the Fed gives its quarterly update on where it sees unemployment, economic growth (Gross Domestic Product), inflation, and where interest rates are headed for the next couple of years. There were a couple of big surprises. First, the Fed believes inflation may not come down any further for the rest of the year. And because of this, the Fed lowered its forecast of interest rate cuts from three this year to just one.

At the same time, they maintained their forecast for economic growth and the unemployment rate which are expected to come in at 2.1% and 4%, respectively, at year's end.

Hawkish Press Conference

Thirty minutes after the Fed statement was released, Fed Chair Powell held a press conference, and here he amplified the position of keeping rates higher longer until inflation moves sustainably towards their goal of 2%.

Despite acknowledging that the jobs report likely overstated the strength of the labor market, the sector market remains tight with unemployment at historically low levels. Mr. Powell also shared he sees no recession on the horizon.

CPI and PPI Come in Low

The Fed calling for inflation to potentially rise from current levels took some of the shine from the low Consumer Price and Producer Price Index for May readings midweek. Inflation readings with or without energy could likely be a one-off in May, as oil prices are already up 10% in June near $80 a barrel.

Bottom line: The near-term outlook for rates is uncertain now that the Fed said it's still higher for longer. Longer-term rates should continue to gradually move lower as the economy continues to cool and unemployment rises.

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