Federal Reserve Holds Interest Rates Steady, Delivers Hawkish Surprise in Economic Projections

In a widely anticipated move, the Federal Reserve announced on Wednesday that it would maintain interest rates within the 5.25-5.50% range for the seventh consecutive meeting. However, the updated Summary of Economic Projections (SEP) delivered a hawkish surprise for markets, signaling fewer potential rate cuts ahead and slightly higher inflation estimates compared to previous projections in March.

The federal funds rate, a key benchmark for interest rates, remains unchanged between 5.25% and 5.50%. The Federal Open Market Committee (FOMC) reiterated its stance that it will not consider reducing the target range until it has gained greater confidence in sustainable inflation movement towards the 2% target.

The Fed’s statement noted that economic activity has continued to expand at a solid pace, although the language used was slightly less optimistic compared to the previous May statement, which described the pace as robust. The central bank also acknowledged modest further progress towards its 2% inflation objective.

Regarding quantitative tightening, there were no changes to the tapering pace outlined in May. The Committee will continue to reduce the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The monthly redemption cap on agency debt and agency mortgage-backed securities will remain at $35 billion, with any excess reinvested into Treasury securities.

The most significant updates came in the economic projections for the federal funds rate. The median FOMC member now anticipates only one rate cut in 2024, down from the three indicated in March. Projections for the federal funds rate in 2025 have been revised upward to 4.1% from 3.9%, and for 2026, it remains unchanged at 3.1%. Expectations for the longer term have risen from 2.6% to 2.8%.

In terms of inflation, the Fed revised upward its projections for Personal Consumption Expenditure (PCE) inflation. The forecast for 2024 increased from 2.4% to 2.6%, and for 2025, it rose from 2.2% to 2.3%. Projections for 2026 and the longer run remained unchanged. Core PCE inflation also saw an uptick, with the forecast for 2024 rising from 2.6% to 2.8%, and for 2025, it increased from 2.2% to 2.3%.

The Fed’s growth outlook, as measured by real GDP, remained unchanged from previous projections.

Following the release of the June Fed statement and new projections, major U.S. indices experienced marginal gains. The SPDR S&P 500 ETF Trust (SPY) was up 0.8%, while the Invesco QQQ Trust (QQQ) rose 1.3% for the day. Market participants now await remarks from Fed Chair Jerome Powell at 2:30 p.m. ET.