Fed holds interest rates steady, lowers forecast to just one cut in 2024 amid high inflation

WASHINGTON— The Federal Reserve kept its key interest rate unchanged again Wednesday and scaled back its forecast from three rate cuts to just one this year after an inflation pickup in early 2024.

The outlook will likely disappoint markets that figured the Fed would pencil in two cuts after an encouraging report early Wednesday showed inflation slowing more than expected.

In a statement after a two-day meeting, the central bank acknowledged a resumption of at least some gains in its battle to tame inflation that has bedeviled Americans the past three years.

“In recent months, there has been modest further progress toward the (Fed’s) 2 percent inflation objective,” the Fed said.

In early May, officials had cited a “lack of further progress” in their battle to curtail price increases.

Learn more: Best current CD rates

But the central bank also reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation (now running about 3% to 3.5%) is moving sustainably toward” the Fed’s 2% goal.

At a news conference, Fed Chair Jerome Powell said, "We want to see more good data to bolster our confidence that inflation is moving sustainably toward 2%."

Is inflation increasing or decreasing right now?

The inflation report Wednesday came in cooler than expected, bolstering the view that a gradual moderation has resumed after price increases accelerated in the first quarter. Inflation overall was flat in May and a core price measure that excludes volatile food and energy items rose 0.2%, nudging down the annual increase to 3.4% from 3.6% the previous month, according to the consumer price index (CPI).

"We see today's report as progress and building confidence," Powell said. "This is a step in the right direction but it really is only one reading." He added, "We hope we get more like it."

How many rate cuts are expected in 2024?

Officials now estimate they’ll lower the federal funds rate by a quarter of a percentage point to a range of 5% to 5.25% by year’s end, according to their median estimate. That’s equivalent to one quarter point cut, fewer than the three decreases they projected in March. Most economists expected the first cut in September.

Policymakers are divided, though, with eight predicting two cuts this year, seven foreseeing one and four looking for none, suggesting the median could change depending on how inflation evolves in coming months.

Officials expect four rate cuts next year and another four in 2026, more than they previously anticipated, a blueprint that would lower the key rate to 3.1% by the end of 2026. That’s in line with their March estimate.

Some economists still believe the Fed will trim rates twice this year.

"Overall, there’s nothing here that rules out a September rate cut," Paul Ashworth of Capital Economics wrote in a note to clients. "It all depends on the incoming data. If employment growth edges down again and the May price data prove to be the start of a renewed disinflationary trend, as we expect, then two rate cuts this year is still the most likely outcome."

Rate cuts lower borrowing costs for consumers, stimulating the economy, and juice the stock market. In recent weeks, Fed officials have said they can be cautious as they weigh lower rates because inflation is still too high and the economy and job market are performing solidly despite nascent signs of a slowdown.

What is the Fed interest rate today?

The Fed’s decision to stand pat for now leaves its benchmark short-term interest rate at a 23-year high of 5.25% to 5.5%. That means Americans will keep paying higher mortgage, credit card, auto loan and other rates but will continue to benefit from more generous bank savings yields after years of meager returns.

Since March 2022, the central bank has hiked the federal funds rate 11 times from near zero to corral a pandemic-induced inflation spike but it has left the rate unchanged since last July.

After hitting a 40-year high of 9.1% in mid-2022, annual inflation eased significantly last year as COVID-related product and labor shortages resolved. But progress stalled early this year in part because wage growth slowed more gradually, propping up price increases for services such as dining out and haircuts. Even some goods prices that had been falling moved higher.

In April, inflation showed signs of softening again but at a slower pace and Wednesday’s CPI report showed the pullback gathered force last month. Although rent, the chief inflation driver, kept rising, auto insurance, which had been surging, dipped and airline fares fell 3.6%. Economists expect cost increases for rent, auto insurance and healthcare to downshift in the months ahead as delayed pandemic effects fade but it’s uncertain how rapidly that will play out.

What is inflation expected to be in 2024?

Fed officials estimate their preferred measure of annual inflation, the personal consumption expenditures (PCE) index, will fall from 2.7% to 2.6% by December, above the 2.4% they predicted in March.

A core PCE inflation reading that the Fed watches more closely is expected to hold steady at 2.8% by the end of the year, above the prior 2.6% estimate. Both overall inflation and the core measure are projected to fall to 2.3% by the end of 2025.

What will happen to the economy in 2024?

On Wednesday, the Fed said it expects the economy to grow 2.1% this year, similar to the prior estimate. It predicts 2% growth in 2025.

The economy grew a sturdy 3.1% in 2023 (as measured from the fourth quarter of 2022 to the fourth quarter of 2023). But growth slowed to less than 2% annualized in the first quarter of this year as low- and middle-income households largely depleted COVID savings and built up massive credit card debt while incurring high delinquency rates,

Will the job market slow down?

The current 4% unemployment rate is projected to end 2024 unchanged, in line with the March forecast, the Fed’s median estimate shows. Monthly job growth has averaged a surprisingly robust 248,000 this year, in line with 2023’s average. Although hiring has slowed, employers have been reluctant to lay off workers after enduring severe pandemic-related labor shortages but that benefit is expected to fade later this year, curtailing payroll gains.

Meanwhile, average yearly wage growth has tumbled to 4.1% from 5.9% in March 2022 but rose from 4% in April. The Fed wants pay increases to come down to 3.5% to align with its 2% inflation target.

Want to learn more? USA TODAY explains the news on interest rates. For more answers to your questions about today's report and other economic trends, keep reading:

Fed holds interest rates

The Fed on Wednesday kept its benchmark short-term interest rate unchanged at 5.25% to 5.5%, as seen in the chart below.

- James Sergent, Bailey Schulz

What does FOMC stand for? 

The FOMC is the Federal Open Market Committee, a 12-member branch of the Federal Reserve System that votes on interest rate decisions.

The committee includes the seven members of the Board of Governors at the Fed; the president of the Federal Reserve Bank of New York; and four other Reserve Bank presidents who hold one-year terms on a rotating basis.

How will stocks react to the Fed announcement? 

Stocks remain bullish, with more than two-thirds of S&P 500 stocks pointing upwards and half trading above their 50-day moving average, according to Liz Sonders, Schwab’s chief investment strategist. 

But underneath the surface, changes are afoot, analysts said. 

“Higher inflation and interest rates have weighed on the outlook for consumer spending as excess savings have largely been spent,” wrote LPL Financial strategists Adam Turnquist and Jeffrey Buchbinder in a report. 

In contrast, industrials have benefitted from “increased infrastructure spending, re-shoring activity, and defense spending,” they said. “Industrials are also a backdoor artificial intelligence (AI) play given their role in data center construction and maintenance.” 

- Medora Lee

Stock market today

Stocks hit record highs Wednesday on the news that inflation is not rising and the Fed could begin cutting rates this year.

The Dow Jones, S&P 500 and Nasdaq all surged in the minutes after the market opened over an inflation report that was downright boring: exactly what the market wanted. Inflation was essentially flat, with the annual rate rising 3.3% in May, compared with 3.4% in April.

The Dow ended the day down 0.09%. The S&P gained 0.9% and the Nasdaq jumped 1.5%, ending the day at record highs.

- Daniel de Visé, Bailey Schulz

How might bond markets react to the Fed? 

If the Fed looks like it’s willing to cut rates on a mere forecast, rather than actual evidence, of inflation slowing to its 2% target, U.S. bond investors “should worry,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.   

“Sure, the Fed is itching to cut rates, but easing policy with a weak economy and a high level of joblessness is very different from the macro environment that the Fed is currently facing,” he said. “Although the domestic economy looks to be slowing back toward trend, the labor market remains tight, unit labor costs and wages are still rising faster than what is consistent with 2% inflation.” 

If inflation reaccelerates or stays high, bond yields will, too. 

- Medora Lee

What will happen to credit card interest rates? 

Credit card interest rates are still climbing, even with the Fed on hold. The average annual percentage rate (ARP) on a new card in June notched the biggest monthly increase since November, rising to 24.80%, LendingTree said. 

“Consumers need to understand that the cavalry isn’t coming anytime soon, so the best thing you can do is take things into your own hands when it comes to lowering credit card interest rates,” said Matt Schulz, LendingTree credit analyst.

- Medora Lee

How can I manage credit card debt when rates are high? 

According to LendingTree credit analyst Matt Schulz, options include:  

• Getting a credit card with 0% interest on balance transfers and purchases 
• Consolidating debts with a low-interest personal loan 
• Asking your card issuer for a lower rate 
• Seeking credit counseling 
• Shopping around for the lowest rates and best deals 

- Medora Lee

Could the Fed feel pressure to cut rates in step with Canada and Europe?

Last week, the European Central Bank and Bank of Canada each lowered their key rates by a quarter point.

Do those moves put the Fed under pressure to cut rates in the U.S.?

"Publicly, the Fed has to say there's no pressure, but privately, it might be a consideration," said Stephen Bittel, founder and chairman of Terranova Corporation, noting that businesses may head abroad to borrow at a cheaper rate. 

But to safeguard consumer purchasing power, experts say, the Fed needs to stay focused on lowering inflation.

"The average person is going through hell," said David Lynd, chief executive at real estate company The Lynd Company. "Inflation is ravaging the consumer. They're out of money, used up their credit cards, borrowing from mom and dad. There's not a lot left with inflation not going down."

Minneapolis Fed President Neel Kasharki says consumers “viscerally hate high inflation” and prefer recession to inflation. "High inflation affects everybody. There’s no one I can lean on for help because everyone in my network is experiencing the same thing I’m experiencing."

And there's still a risk that high inflation could persist. "The economy has repeatedly surprised to the upside since the Fed stopped hiking and began forecasting cuts," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.

- Medora Lee

When can I expect mortgage rates to fall? 

The Fed doesn't set mortgage rates, but what it does with the federal funds rate can influence them, along with the bond market and inflation. 

“There’s a good chance that we’re going to need to get used to rates around 7% again, at least until we start getting better economic news,” said Jacob Channel, senior economist at comparison site LendingTree. “Unfortunately, this probably means that summer homebuying season is going to be expensive and difficult for many would-be buyers to navigate.” 

That shouldn’t dissuade you from buying a home you love and can afford. 

“If you spend too much time waiting for the ‘perfect’ conditions to arise, you could end up letting a lot of good opportunities go to waste,” he said.  

You can also refinance when rates drop, experts said. 

The average 30-year fixed mortgage rate was 7.38% on June 7. The average rate was 6.59% on a 15-year fixed-rate mortgage.  

- Medora Lee

How are auto loan rates affected by the Fed? 

Borrowers’ rates on auto loans are mostly based on factors like credit background, vehicle price, down payment and the lender’s borrowing costs and risks. Fed rate moves have only a small effect. 

Still, interest rates on new and used car loans are elevated, hampering car sales, analysts said. 

In the first three months of the year, the average APR for new vehicles was 7.1%, marking the fifth consecutive quarter this figure has remained above 7%, while used-vehicle APRs rose one-tenth of a percentage point to 11.7% from the end of last year, car comparison site Edmunds said. 

Even the return of new-vehicle incentives isn’t enough to combat steadily high interest rates and climbing negative equity, said Jessica Caldwell, Edmunds’ head of insights. Negative equity means your car’s value is less than what you paid. Negative equity on trade-ins reached an all-time average high of $6,167 this year, she said.

- Medora Lee

How much will I get in Social Security?

The latest estimate of Social Security's cost-of-living adjustment for 2025 slipped to 3% after the government reported 3.3% inflation in May, new calculations showed on Wednesday.

The 2025 COLA adjustment eased along with inflation, following an uptick earlier this year. But the increase probably lowballs what seniors will need to keep up with inflation, said Mary Johnson, a retired analyst for the nonprofit Senior Citizens League who tracks and calculates COLA estimates.

The consumer price index (CPI), a broad measure of goods and services costs, rose 3.3% in May from a year earlier. That's down from 3.4% in April.

The Social Security cost-of-living adjustment is based on the "consumer price index for urban wage earners and clerical workers," or CPI-W. That figure dipped to 3.3% from April's 3.4%, but it still outpaced the 3.2% COLA Social Security recipients began receiving in January. 

- Medora Lee

COLA estimate:Social Security COLA estimate dips, but seniors remain in a hole. Here's why.

When did the Fed last cut interest rates?

A lot has happened in the last three years. But not a lot of interest rate cuts. 

For months now, market forecasters have wondered when the Federal Reserve would step in to reduce interest rates. But the Fed hasn’t budged. The benchmark rate stands at a target range of 5.25% to 5.5%, where it has been since July: Nearly a year. 

The last time the Fed actually cut interest rates was in March 2020, at the peak of the pandemic. In an emergency meeting on March 14 and 15, the Fed moved to trim its target rate by a full percentage point, from a range of 1%-1.25% to a range of 0-0.25%: Effectively, zero. 

The next time the Fed acted on interest rates was two years later, almost to the day, in a meeting on March 15 and 16, 2022. Worried about rising inflation, the panel ordered a quarter-point increase, to a target range of 0.25% to 0.50%. 

It’s been all uphill from there. In a series of meetings between that March and July 2023, the Fed pushed interest rates up five full points, setting them at their current level.

- Daniel de Visé

The economy:At 3.3%, inflation remains too high for Fed. What economic data are saying, too

Today's mortgage rates

While the Fed's recent campaign of interest-rate hikes doesn't directly affect mortgage rates, the increases have rippled through the economy and made the math more difficult for homebuyers. 

As of Tuesday, the average annual percentage rate (APR) for a 30-year fixed mortgage was 7.50%. That rate was about the same as a month ago, but much higher than the mortgage rates we saw between 2010 and early 2022.

Late last year, mortgage rates reached a peak of 7.79%. At that rate, new buyers were paying $2,877 in principle and interest on a $400,000 mortgage, according to Bankrate's mortgage calculator. That's more than $1,000 higher than payments on a similar mortgage before the Fed started battling inflation.

Mortgage rates are up from the beginning of the year and well above the 10-year median.

Not surprisingly, as mortgage rates have risen, existing home sales have tumbled. At the same time, average home prices are rising, because fewer homes are on the market. According to economists, homeowners with mortgage rates of 3% or lower are understandably reluctant to give them up. 

- Jim Sergent and Daniel de Visé

How is the U.S. economy doing?

The U.S. unemployment rate rose to 4% in May. The monthly number, which represents the percentage of people who are unemployed and looking for work, ticked up from 3.9% in April.

The unemployment rate is rising slowly, which could suggest that employers are pulling back on hiring. Still, the rate remains below the 10-year monthly median rate of 4.3%. The job market had been on a similar roll in 2020 before the pandemic put millions out of work.

The U.S. economy produced $22.7 trillion of goods on an inflation-adjusted, annualized basis in the first quarter of 2024. That activity pushed up GDP by 1.3% – recently adjusted down from 1.6% – from the fourth quarter of 2023.

In other words, the U.S. economy is still growing, but not at a very brisk pace. Some have speculated the Fed's campaign of interest-rate increases may be starting to weigh on businesses and consumers. Another factor is a spike in imports, reflecting Americans’ purchases from overseas producers.

- Jim Sergent

Why is inflation still elevated?

The annual inflation rate seems to be stalled in the range of 3% to 3.5%, a space it has occupied since the start of the year. And while that figure isn't particularly high, it's higher than the 2% rate the Federal Reserve has set as a goal.

Why does inflation remain elevated?

One of the “uncontrollable” inflation components is rent, which remains high and accounts for about one-third of the basket of goods and services used to calculate the consumer price index, said Stephen Bittel, founder and chairman of Terranova Corporation, an alternative investment firm specializing in commercial real estate.

Last month, at a conference in Amsterdam, Fed Chair Jerome Powell called housing inflation “a bit of a puzzle.” Measures of new apartment leases show rents barely increasing.

Friday’s surprisingly strong jobs report, coupled with a 4.1% year-over-year jump in wages, “should drive a rebound in consumer spending,” said Nationwide chief economist Kathy Bostjancic. That trend, too, “could help keep inflation more buoyant," she said, further delaying the timeline of any interest rate cuts by the Fed.

- Medora Lee

How will inflation news affect the Fed's interest rate decision?

Wednesday’s inflation report should come as welcome news to the Federal Reserve, analysts and forecasters said.

Inflation was essentially flat in May, defying fears of an overheated economy.  

“As we hear from the Fed later today, today’s inflation data should be another feather in the cap for Chairman Powell and raise the confidence for the rest of the voting members,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. “More importantly, as we look further out on the calendar, the distance from here to the first rate cut of the cycle appears to be rapidly approaching.”

But analysts cautioned that the new inflation report was hardly definitive.

“Overall, today’s inflation numbers will be a welcome sight for the Fed, though certainly not enough to push them to cut rates,” said Elizabeth Renter, a data analyst at NerdWallet, the personal finance site.

"The Fed will be glad to see inflation slow in this report,” said Bill Adams, Chief Economist for Comerica Bank. “But they will wait for clearer progress toward their inflation target before they start cutting interest rates.”

Comerica’s forecast has the Fed holding interest rates steady today, and again at its next meeting in July, then cutting rates in September, with another likely cut in December: two in all.

- Daniel de Visé

When is the next Fed meeting in 2024? 

After today’s meeting, the Federal Reserve has four more chances to act on interest rates this year. The panel meets every month or two.

Here are the remaining Fed meetings planned for 2024, including this week’s session: 

• June 11-12 
• July 30-31 
• Sept. 17-18 
• Nov. 6-7 
• Dec. 17-18 

- Daniel de Visé

When will inflation cool enough for the Fed to cut interest rates?

The Fed’s benchmark, short-term interest rate has stood at a 23-year high of 5.25% to 5.5% since July, as the Fed waits for inflation to cool. 

Annual inflation dipped to 3.3% in May from 3.4% in April – far below the peak of 9.1% in June 2022, but still above the Fed’s 2% goal.

Odds are slim for a rate cut this summer. Yet, futures markets are still betting on one cut this year, probably in September, as inflation retreats, according to the CME FedWatch Tool, which measures market expectations for changes in the benchmark rate.

As recently as March, the median forecast called for three rate cuts this year. Fed officials have since acknowledged that inflation has been surprisingly slow to drop, and economists expect the panel to pencil in fewer rate cuts. But one cut, or two? It will be a close call.

- Medora Lee

What is inflation right now?

The May consumer price index (CPI) is out, coming just hours before the Fed’s meeting ends, and new inflation data could influence the Fed’s rate cut forecasts.

The Bureau of Labor Statistics released May's consumer price index Wednesday morning. For the month, inflation, as measured by the CPI, was unchanged when seasonally adjusted. The annual inflation rate fell slightly to 3.3%.

Thus, while inflation isn’t spiking, the annual rate appears stuck above 3%. That's more than a full percentage point above where Fed officials want to see it, and another sign that borrowing costs will remain elevated.

The inflation report “could influence the tone” of the Fed meeting, wrote Deutsche Bank chief economist Matthew Luzzetti, in a note. Fed Chair Jerome Powell’s “comments on inflation will no doubt reflect the May CPI data released that morning.” 

- Medora Lee and James Sergent

Will interest rates go down in 2024?

Almost no one expects the Federal Reserve to lower interest rates when officials conclude their two-day meeting Wednesday. But economists and investors will be looking for clues about when the central bank finally might cut its key rate, and how many times it might do so this year.

Coming into the year, many economists predicted rates would already be falling. They expected as many as six or seven rate cuts this year.

But inflation endures, and at this point, most economists have scaled back their rate cut predictions to two, one or none in 2024. A few experts, including Minneapolis Fed President Neel Kashkari, have even suggested a rate hike probably won’t happen at all.

Interest rates are the main tool the Fed uses to combat inflation. High rates make borrowing more expensive, which slows spending and the economy, generally easing overall price hikes. 

- Medora Lee