The Fed decided to leave interest rates unchanged after the Federal Open Market Committee (FOMC) meeting that ended June 12, in a move that was widely anticipated by investors and markets.
The target range for the federal funds rate is remaining at 5.25% to 5.50%, where it has held steady since July 2023.
While the Fed has been keeping its cards close to its chest in recent months, developments in economic data and in the Fed’s message are providing some clues as to when rates might finally come down and how the Fed may proceed from here.
Read on for 6 takeaways from the Fed’s most recent decision, and what it might mean for investors.
1. Why did the Fed leave rates unchanged?
Going into this week’s meeting, the Fed didn’t have much leeway to cut rates, says Andrew Garvey, the lead monetary policy analyst on Fidelity’s Asset Allocation Research Team.
“You have to bring it back to the Fed’s dual mandate,” Garvey says. “Its goals are price stability and maximum employment, and right now both sides of that mandate are indicating that it would be too soon to start easing rates. Inflation is still above their target, and we haven’t seen broader unemployment measures really tick up.”
While inflation has fallen substantially from its 2022 peak, progress in reducing inflation has slowed. The Consumer Price Index (CPI) has shown the annual inflation rate moving in a range of 3.1% to 3.5% so far this year.1 One of the Fed’s preferred measures of inflation, the Personal Consumption Expenditures Price Index excluding food and energy (aka Core PCE), has showed annual inflation holding steady around 2.8% to 2.9% this year.2
“Inflation prints in the last couple of months, which have brought some relief after reaccelerating at the start of the year, have been steps in the right direction,” says Kana Norimoto, the macro strategist on Fidelity's fixed income research team who covers the Fed. “But the Fed may need to see inflation decelerating to gain confidence that things are moving in the right direction.”
2. What has changed since the Fed's last meeting?
There have not been significant changes in the Fed’s most important indicators—namely inflation and unemployment—since the central bank’s previous meeting in May. (Although unemployment ticked up slightly in the most recent household survey jobs report, the number of jobs added in the establishment survey came in stronger than expected.)
But some subtle signs of cooling have emerged among other indicators. Job openings fell to their lowest level in 3 years according to the latest release.3 The most recent report on retail sales showed consumers spending less than had been expected.4 And revisions to GDP numbers showed the economy actually grew less than initially estimated in the first quarter, due to lower consumer spending.5
These indicators haven’t fallen sufficiently to indicate outright weakness in the economy. For example, falling job openings are more indicative that the hot jobs market is “normalizing” rather than cooling to a concerning degree, says Garvey. But they might be early indicators of economic softening yet to come.
3. How low must inflation fall for the Fed to cut rates?
The Fed is targeting a 2% inflation rate and has communicated steadfastness in its commitment to achieving that rate.
That said, it’s unlikely the Fed will wait for the inflation rate to actually reach 2% before cutting rates. If inflation falls too much, an economy can risk entering a period of deflation, when prices fall. (Although deflation might sound like a relief to consumers weary of high prices, it can pose severe risks to economic growth.) Moreover, the Fed’s dual mandate means that it must balance its aim of bringing inflation down against its aim of keeping unemployment low.
“The Fed is very determined to respond rapidly to any deterioration in the labor market,” says Norimoto. If unemployment were to tick up meaningfully, it might prompt the Fed to start cutting rates even if inflation is still above target.
4. Is the Fed still going to cut rates this year?
This week’s Fed release included an updated dot plot—a chart that shows where each member of the Fed’s policymaking committee expects interest rates to be over the next few years.
FOMC members are not in consensus as to where interest rates might be at the end of the year. But according to the median estimate in the dot plot, the US could see one quarter-point interest rate cut before the end of 2024. That was a decline from the previous dot plot, in which the median expectation was for 3 quarter-point cuts before the end of the year.
However, it’s impossible to say with total certainty whether or not the Fed will proceed with those potential cuts, because the Fed is continuing to operate in a cautious and “data-dependent” manner. Inflation in the first few months of the year came in above the Fed’s own forecasts—a surprise that has made the Fed more wary of relying on projections, and more likely to hold off on policy adjustments until it sees clearer signals from economic data.
“We’re kind of living month by month right now,” says Norimoto. Whether the Fed does cut before year-end, and if so, how many times it cuts, will depend on the data that comes out over the rest of the year.
5. Why has inflation not fallen more?
Raising interest rates is one of the primary tools that central banks use to subdue high inflation. Given that the Fed started raising rates more than 2 years ago, and has now held them steady at a high level for almost a year, it’s been surprising to some investors that progress in reducing inflation seems to have stalled.
One reason might be that so many corporations refinanced their debt and so many households refinanced their mortgages amid the low interest rates of the pandemic, Norimoto says. With so many borrowers locked in with low rates, the economy has seemed less sensitive to higher rates than it has been in the past.
Another reason is that higher interest rates—while generally effective at encouraging consumers to spend less—are less effective at impacting the supply-side problems that have continued to put upward pressure on prices. As Garvey points out, one key ongoing contributor to high inflation is housing, where a lack of supply has continued to hold up prices. Another example Norimoto points to is a shortage of workers in a number of fields, which has contributed to rising costs.
High interest rates do not help correct such shortages, which are among the reasons why inflation could continue to hover around the 3% level over the near and longer term.
6. What do continued high rates and inflation mean for investors?
While stickier inflation and continued high rates might not be what some investors have been hoping for, there may still be reasons for optimism, says Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of Fidelity’s managed accounts.
For one thing, further rate hikes do not appear to be on the table at this time (with the caveat that this could always change if inflation were to surprisingly reaccelerate). “That might mean more price stability for bond investors going forward,” says Malwal, on top of the higher interest income that bond investors may now be earning. If the Fed does eventually cut later this year, it could even fuel price gains among some bond investments.
And although a 3% inflation rate might sound high compared with recent memory, Malwal notes that it’s not so unusual compared with the market’s longer history.
“If you go back longer term—over the last 70 or 100 years—inflation has often been around 3% or more,” Malwal says. “And guess what? Over that time, the economy has grown while stocks and bonds have delivered healthy returns for investors. So I don’t believe this environment requires a whole new way of investing.”