The latest message from the Federal Reserve is that it isn’t quite ready to cut interest rates, but the option remains open for this year. Federal Reserve Chair Jerome Powell repeatedly told the press, after the June FOMC meeting, that the committee is still waiting for the confidence that “inflation is moving sustainably towards the 2% target.” It is undeniable that progress has been made, bringing inflation down from its peak rate of 9%, but past progress isn’t enough to warrant a change yet. The Fed is encouraged by the recent declines in inflation and believes current monetary policy is working. Most of all, the central bank believes it has time to wait before making a change. When pressed if the Fed might wait too long, Powell reinforced the plan isn’t to wait until things break and believes they “are on the right path.”

When asked for signs that would warrant the right time to change monetary policy, especially in respect to a weakening labor market, Powell said, with a chuckle, he could think of many but “will not utter them here.” He added there is not just one factor that would dictate a cut, but the totality of economic data to determine if enough progress has been made. Once again Powell said, “it is simply not appropriate to cut rates until inflation has moved sustainably to 2%.” It is safe to say we got the message.

The biggest takeaway from the June dot plot is that committee members shaved off two rate cuts this year from the projections in March, leaving the chance for one cut alive. Four committee members were in favor of no cuts this year, compared to two members in March. Powell dismissed the negative implications of this, pointing out that the fed funds rate will ultimately end up in the same place, it’s just taking a bit longer to get there. Year-end fed funds is projected to be near 5.10% versus the current median rate of 5.35%.

Inflation – May inflation data, together with April’s, confirms the first quarter spike was not the beginning of an inflation resurgence. Both CPI and PPI levels came in lower than expected and were below April’s numbers. Headline inflation was flat in May – the first time in almost two years the index did not rise. The annual rate of core inflation came down to 3.4% – the lowest rate in over three years. Prices for gasoline, new cars, airline tickets and car insurance were the biggest factors for moderating inflation. Used cars, shelter and food costs remain in the gaining category but not enough to sway the Fed from leaning towards easing this year. The Fed will likely focus on the 0.4% drop in the super core index to support the view that inflation is stabilizing and possibly even falling. The cost of processed goods, which reflect prices earlier in the production pipeline, fell 1.5% – the most since the end of 2022 – adding promise that consumer prices will continue to fall.