Amid calls from some legislators for the US Federal Reserve to cut interest rates, the central bank’s Federal Open Market Committee (FOMC) announced on June 12 that it would keep rates unchanged despite a recent easing in inflation pressures.
The FOMC members explained in a statement that followed the central bank's June policy meeting that there has been only “modest further progress toward the Committee's 2 percent inflation objective” over the past several months. The FOMC’s updated projections implied that the Fed would deliver at least one rate cut before the end of 2024, two fewer than forecast in the Committee’s March forecast.
In the Q&A below, Columbia Business School Professor Brett House, a macroeconomist, dissects the latest inflation data from May, the Fed’s announcements, and their implications for the economy and households.
CBS: What did the May inflation data tell us about the United States’ economy?
Brett House: The May price numbers showed encouraging signs that inflationary pressures are waning more than expected after a few months of hotter readings. The aggregate consumer price index was unchanged from April to May, which left prices 3.3% higher than a year earlier. While that’s still well above the Fed’s 2% average headline inflation target, core inflation slowed to its weakest pace in about three years. Medium-term Treasury yields fell as markets priced in expectations of a rate cut from the Fed as early as September.
CBS: How did the ensuing FOMC interest-rate decision both meet and deviate from expectations?
House: The market moves driven by the May inflation print got unwound when the FOMC confirmed that it had decided to hold the upper end of the federal funds rate target range at 5.5%, where it has been since July 2023. While this steadiness was entirely expected, it was accompanied by three big indications that the Fed is going to wait longer than previously anticipated to begin cutting interest rates—notwithstanding May’s helpful price numbers.
First, Fed Chair Jerome Powell indicated in his press conference after the FOMC meeting that the central bank was still looking for “something that would give us confidence that inflation is moving sustainably down.” The bar for an initial rate cut is high.
Second, in the FOMC’s updated projections—also known colloquially as the “dot plots”—the Committee pushed out its path of expected rate cuts. By a narrow margin, FOMC members now foresee only 25 basis points (i.e., 0.25 percentage points) in cuts in 2024 compared with 75bps in their March projections; 100bps of cuts are projected to follow in each of the next two years to bring the fed funds rate to an unchanged projection of 3.25% in 2026.
Third, the Committee members raised their projection of the long-run fed funds rate—the so-called “neutral” policy rate that is neither restrictive or stimulative to the economy—from March’s 2.6% to 2.75%. This implies that the FOMC’s members will be slower to cut their key policy rates since they no longer perceive their current levels to be as tight as they did in March.
CBS: Is the Fed’s policy stance distinct from those of other major central banks?
House: After 2022’s surge in inflation and rapid policy rate hikes, many major monetary authorities are starting to reduce interest rates. In recent weeks, the European Central Bank (ECB), as well as the central banks of Canada, Switzerland, Sweden, Hungary, and Czechia, have implemented rate cuts. In broad terms, however, each of these economies feature some combination of weaker growth, softer inflation, and less fiscal stimulus than the Fed faces in the US. Immediate rate cuts are more obviously appropriate in these economies, but softening US inflation and labor markets could still lead FOMC members to revise their views again and deliver two 25bps cuts in 2024.
Japan is the big outlier amongst the world’s major economies: after years of little growth, weak inflation, and negative interest rates, in March 2024 the Bank of Japan raised its key policy rate for the first time in 20 years.
CBS: What does all of this mean for American households and businesses?
House: Holding policy rates high for longer than previously anticipated benefits those who can save. While interest rates paid on savings accounts and money-market funds haven’t moved much, rates on certificates of deposit and high-yield saving accounts track Treasury yields and they’ve come down from April’s peaks in anticipation of rate cuts later this year.
For borrowers, high rates maintain pressure on the budgets of anyone with variable-rate debt such as revolving credit-card balances, home-equity lines of credit, adjustable-rate mortgages, and some business loans. High rates also keep the borrowing environment tough for anyone looking to take out new financing.
But it’s worth remembering that the interest rates on many credit vehicles, such as new car loans and fixed-rate mortgages, track five- and 10-year Treasury yields, which move to reflect investors’ expectations of inflation, growth, and credit demand—as well as the Fed’s actions. These yields have retreated from their recent highs.
New federal student loans carry rates that are set each July through a formula based on the 10-year Treasury yield at the May auctions of US government bonds. These rates aren’t affected by the FOMC’s June decision, but July’s fixing will be at the highest levels in about a decade.
CBS: What potential impact could the upcoming election have on the Fed’s interest rate decisions?
House: All major central banks strive to ensure that their monetary-policy actions are grounded in transparent data and objective model-based decision-making frameworks—and the Fed is no exception. Like its peers, the Fed will do everything possible in the run-up to November to avoid any appearance that its moves could skew support for either party, while still delivering what is needed to achieve its dual mandate of maximum employment and stable prices.
With scheduled interest decisions in July, September, November, the latter of which will be announced one day after the vote, the Fed will need to clearly communicate the rationale for its actions in order to ensure its moves are properly understood.
