Encouraging Inflation Report Overshadows June Fed Meeting

In this article we review: 

• The statement language and Chair Jerome Powell’s commentary following the conclusion of the Federal Reserve’s June meeting
• An assessment of the Fed’s new dot plot of rate expectations for the remainder of the year
• The May consumer price index inflation report and why it encouraged investors 
• Our forecast of two, quarter-point rate cuts coming from the Fed in 4Q and a year-end target range on the federal funds rate of 4.75%–5.00%

As expected, the Federal Reserve took no policy action at its meeting that concluded June 12, maintaining its federal funds rate target range at 5.25%–5.50%. While taking a more hawkish perspective on potential future rate cuts between now and year-end, the Fed’s thunder was more than a bit stolen by the May consumer price index (CPI) inflation report released that same morning. The report inspired the markets into a dovish reaction, even if that was not implicitly supported by the language or forecasts of the Fed itself. Against this backdrop, we believe the following points are important for investors:

Little change in the Fed statement. Aside from descriptive language pertaining to the quantitative tightening schedule released at the May meeting, only one word was revised from that previous meeting’s statement. This was changing, “lack of,” to the word, “modest,” when describing “further progress toward the committee’s 2% inflation objective.” We view this three-word swap in the verbiage as incrementally favorable and supportive of a more encouraging outlook on recently flatlining inflation since the year began.

Shift in the dot plot. Perhaps the biggest development from the meeting was a notable transition in the “Participants’ Assessment of Appropriate Monetary Policy,” more commonly known as the dot plot, an anonymous survey of the committee’s 19 voting members as to where they believe the fed funds range is likely to be at the end of the next three calendar years. Their median expectation of 5.00%–5.25% at the end of CY 2024 represents only one rate cut between now and year-end, down from the expectation of three rate reductions as of the previous March survey. While this can be interpreted as a hawkish turn by the Fed, we highly caution against reading too much into Fed dot plots at this time as they can be subject to wide swings. History has also shown little correlation between these snapshots in time expectations and actual future rate outcomes. 

Chair Powell once again highlighted the need to see more favorable inflation data and confirmed current policy as restrictive. In his post-meeting press conference, Chair Powell reiterated the committee’s stance that more and better inflation data will be necessary before future rate cuts, as expressed in his comment, “The most recent inflation readings have been more favorable than earlier in the year … but (we) will need to see more good data to bolster our confidence that inflation is sustainably moving toward 2%.” Regarding the current level of rates, he also said, “The evidence is clear that policy is restrictive and is having the effects we would hope for.” We view the combined message of these separate comments as inferring the Fed is looking to reduce rates once inflation resumes a downward trajectory closer to the trendlines of last year.

May CPI inflation report exceeding downside expectations overshadows June Fed Meeting. With core (ex-food and energy) CPI released just hours before the Fed’s meeting and coming in at a year-over-year rate of 3.4% (its lowest level since April 2021), markets quickly cheered on the notion that stubborn inflation during the first few months of the year may have been more indicative of seasonal price increases and the longer-term trend has resumed a downward pace. This was evident throughout the day’s trading as bond yields fell and stocks rose despite the Fed’s more hawkish tone.

In summary, we are encouraged by more recent inflation reports over the past month that, we believe, could be setting the stage for combined CPI and personal consumption expenditures core inflation averaging below 3% by year-end. This, we also believe, could fit the necessary criteria for the Fed to reduce rates within that time frame. We therefore maintain our expectations of two, quarter-point rate cuts in 4Q and our year-end 2024 forecast of a fed funds target range of 4.75%–5.00%.  

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