USD drops as Fed signals only one interest rate cut this year

US Federal Reserve officials have indicated that they anticipate cutting interest rates only once this year, maintaining a hawkish stance on inflation as they keep borrowing costs at a 23-year high.

Yesterday's updated forecasts showed that the Fed's median rate setter plans to implement one quarter-point cut this year, surprising currency markets that had expected two cuts before the report.

The new forecasts marked a notable shift from the Federal Open Market Committee's earlier communication, where officials had signaled three cuts this year. This adjustment reflects persistent concerns that inflation remains above the Fed's 2% target.

Despite the release of cooler-than-expected consumer price index data for May just hours before the meeting, the Fed issued a hawkish signal. This data had triggered a sharp equity market rally and lowered Treasury yields, with analysts previously betting on two rate cuts this year.

Fed Chair Jerome Powell characterized the CPI figure as encouraging and minimized the committee's higher inflation forecasts as being somewhat conservative. Powell noted that with 15 of the 19 members supporting either one or two cuts, both options were plausible.

Expectations of a rate cut in September, the Fed's last meeting before the November presidential election, declined to about 64% from over 80% prior to yesterday's central bank announcement. FOMC members acknowledged modest further progress toward their 2% inflation goal, reflecting a more confident stance compared to their last policy vote in May.

However, four members of the committee indicated they expected no cuts, while seven anticipated implementing just one quarter-point cut. Eight out of the 19 members supported two rate cuts.

The median projection for the benchmark federal funds rate was 5.1%, indicating a potential reduction of just over a quarter-point.

Fed officials' recent signal on interest rates aligned with the central bank's updated growth forecasts, projecting that the US economy will expand by 2.1% in 2024, consistent with its previous forecast. The FOMC also predicted that unemployment would hold steady at 4% by the year's end.

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