• The Federal Reserve keeps interest rates unchanged for eight months in a raw
• The Fed delivers a hawkish surprise and only sees one rate cut this year

FOMC Meeting Summary

Following its latest policy meeting on Wednesday the Federal Reserve kept its benchmark interest rate unchanged in the range of 5.25% to 5.50% as widely expected. The committee cited recent indicators suggesting continued solid economic growth, strong job gains, and a low unemployment rate. However, inflation remains elevated, and the committee does not expect to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2% goal.

The central bank delivered a hawkish surprise and announced it only sees one rate cut in 2024 from three expected back in March, as it projects inflation to remain higher than previously expected.

Key Takeaways

Interest Rates: The Federal Reserve projects the benchmark interest rate to fall to 5.1% this year. In 2025, Fed members expect interest rates to fall to 4.1%, up from a previous forecast for 3.9%. In 2026, the central bank sees rates declining to 3.1%.

While the majority of the committee members envisaged one rate cut this year, four members supported no rate cuts at all. Clearly the Fed’s projections were more hawkish than expected and are a result of the increased inflation forecast, following a string of elevated inflation data in the first three months of the year.

Inflation: The U.S. consumer price index (CPI) increased 3.3% in May on an annual basis, slightly below economists’ expectations of 3.4%. This cooler-than-expected inflation data fuelled optimism that the disinflation trend remains intact, though the Fed cautioned that it would require more consistent progress to consider lowering interest rates.

Labour Market: The labour market continues to show resilience, with the U.S. non-farm payroll report showing the labour market adding 272,000 jobs in May. However, the unemployment rate rose to 4% in May, the highest level in over two years, driven by people unable to find work after returning to the labour force.

Meanwhile, the central bank sees the unemployment rate at 4% this year, unchanged from the prior forecast in March. In 2025, the unemployment is now expected to increase to 4.2%, up 0.1% from the previous projection of 4.1%.

Wage Growth: Average hourly earnings rose by 0.4% month-over-month and 4.1% year-over-year in May, indicating that wage growth remains strong.

Inflation Projections: The core personal consumption expenditures price index (PCE), which is the Fed’s preferred measure of inflation, is forecast to be 2.8% in 2024, up from a prior forecast of 2.6%. For 2025, inflation is estimated to be 2.3%, up from 2.2% previously. The forecast for gross domestic product (GDP) was left unchanged at 2.1% for 2024 and 2% for 2025.

Source: TradingView

Market Outlook:

The S&P 500 posted a fresh record high of 5,447 on Wednesday as the softer than expected inflation data overshadowed the Fed’s outlook for one rate cut by year end.

The slower than expected inflation in May is encouraging and revives the optimism that the disinflationary trend is intact. If inflation continues to moderate in the coming months the Fed may be inclined to deliver more than one cut in 2024, which would be positive for the broader stock market.

Wednesday’s price action broke above its uptrend channel line, suggesting that in the short-term the index is likely to retreat.

The Relative Strength Index (RSI) reached overbought territory pointing to a likely pull back to unwind the overbought momentum conditions. While we remain positive in the long-term and levels in the range of 5,600 – 5,650 remain feasible by year end, a correction to 5,200 in the short-term is possible.

Professional traders looking for magnified exposure to the U.S. stock market may consider Leverage Shares +5x Long US 500 or -3x Short US 500 ETPs.