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The Fed isn't really taking 2 rate cuts off the table

This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:

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On Wednesday, the Federal Reserve revised its outlook for interest rate policy in 2024, signaling just one cut instead of the three seen back in March.

A disappointing outlook on the surface for investors hoping for more reductions to interest rates this year — but as Fed Chair Jerome Powell reminded us, the projection is hardly set in stone.

As has often been the case, Powell reiterated that the projections are just a "forecast" and don't reflect a "really strong commitment to a particular rate path."

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Within the Fed's "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future, eight officials penciled in one rate cut for 2024, while seven officials projected two cuts. That's a close call. Meanwhile, four officials saw no easing at all this year. Powell said at a press conference that he takes this to mean that all outcomes laid out in the Summary of Economic Projections (SEP) —anywhere from no cuts to two cuts — are "plausible."

He added that officials aren't trying to "send a strong signal" with their rate forecast. Indeed, markets largely shrugged off the revision. Stocks ticked lower from their intraday highs when the forecast was released, but the S&P 500 (^GSPC) still closed above 5,400 for the first time ever, while the Nasdaq Composite (^IXIC) rallied more than 1.5% to also notch a record close. Moreover, investors continued to price in two rate cuts for the year starting in September as the most likely scenario, per data from the CME FedWatch Tool.

Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, June 12, 2024. (AP Photo/Susan Walsh)
Federal Reserve Board Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, June 12, 2024. (AP Photo/Susan Walsh) (ASSOCIATED PRESS)

Two factors will help determine whether that's in the cards. One is the job market. The unemployment rate recently hit its highest level since January 2022, and Powell noted that a weakening in the labor market could prompt an interest rate cut. That's not happening yet.

"We kind of see what we wanted to see, which was gradual cooling in demand, gradual rebalancing in the labor market, while we're continuing to make progress on inflation," Powell said. "So, I mean, we're getting good results here."

The second is more progress on price stability. Should the data show more positive surprises on the inflation front, like with Wednesday morning's Consumer Price Index print, there's no reason to think the forecasts can't shift again.

"Softer inflation alone will likely be enough to convince the Fed to cut policy rates in September," Citi chief US economist Andrew Hollenhorst wrote in a research note following the release.

Hollenhorst reasoned that Powell's comments and the Fed officials' projections present a "low bar" for the central bank to welcome further easing.

As Powell himself put it, the Fed's forecasts are "data dependent." This means, just like the data, the forecasts can still bring investors a welcome surprise in the future too.

morning brief image
morning brief image

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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