Washington, D.C. – Despite a softer monthly inflation reading, Federal Reserve officials decided to delay the anticipated start of interest rate cuts. The core consumer price index (CPI) inflation reported its weakest monthly reading in nearly three years on the same day. However, the Fed revised its estimate for where its policy rate would end at the year’s conclusion, projecting a 5.1% median rate, indicating one 25-basis-point rate cut in 2024 instead of the previously estimated three cuts.

The combination of the CPI and Federal Reserve news did not significantly alter the near-term U.S. outlook, with expectations of slowing but steady growth, inflation above the target, and a patient Fed. The Fed’s adjustment followed a sharp rise in core personal consumption expenditures (PCE) inflation in the first quarter, signaling a need for a sustained downward trend in inflation reports before officials gain confidence that inflation is returning to a sustainable 2%.

Despite a potential cooling of inflation in the coming months, the annualized core PCE rate could still exceed the Fed’s median projection of 2.8%, possibly reaching 3% by the end of 2024 due to base effects. This higher than expected inflation could complicate the optics of rate cuts in a generally strong U.S. economy, leading many Fed officials to indicate a delay in cutting rates.

While recent U.S. economic indicators suggest a slowing growth rate and some labor market indicators are mixed, a balance in labor markets also points to a delay rather than a cancellation of cuts. The Fed remains watchful for any unexpected weaknesses in the labor market and is prepared to adjust its policies accordingly.

In the current economic climate, the May CPI data indicated improvements, showing the weakest reading since 2021. This could be a step forward in the Fed’s quest to gain more confidence in hitting its target, though the report should not be overemphasized as a single report does not dictate a clear trend.

The Federal Reserve’s readiness to remain patient for a longer duration was driven by higher first-quarter inflation, leading to a delay in the projected start of policy normalization. Fed Chair Jerome Powell balanced the positive news on inflation with revisions in the policy outlook, highlighting the need for continued progress in controlling inflation. The Fed’s approach reflects a cautious stance, focusing on broader trends rather than singular data points.

In conclusion, the May CPI data and the June Fed announcements did not substantially alter the near-term outlook for the economy, inflation, or monetary policy. The expectation remains for the Fed to start easing rates later in the year, adjusting its response based on inflation trends and labor market conditions. Market reactions align with the Fed’s projections, but intermediate maturity government bond yields continue to be attractive, offering a cushion against potential policy rate changes.