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At its June 2024 meeting, the Federal Open Market Committee (FOMC), the policy-setting arm of the U.S. Federal Reserve (Fed), left interest rates unchanged and maintained the pace of its balance sheet runoff. In looking at the FOMC’s post-meeting statement and Summary Economic Projections (SEP) issued on June 12 and Fed Chair Jerome Powell’s subsequent press conference, we have the following observations:

  1. The SEP showed that FOMC members expect the fed funds rate to fall to 5.1% at the end of this year and to 4.1% at year-end 2025. That is up from 4.6% and 3.9%, respectively. Higher rate projections are a consequence of higher inflation projections: The SEP had core inflation (which excludes food and energy prices) running at 2.8% at the end of 2024 and 2.3% at the end of 2025, versus 2.6% and 2.2% previously.
  2. In the press conference, Chair Powell continued to avoid mentioning anything that would suggest that rates might need to rise. Instead, he stated that if inflation says too high, the FOMC would maintain the current rate level indefinitely.
  3. The estimate of the long-run neutral rate—also known as r-star—moved up to 2.8% from 2.6%, but Powell downplayed the significance of this for policy decisions. He reasserted that current monetary policy was clearly restrictive, but that it was impossible to say how restrictive with any precision.
  4. Powell also stated that there was a national housing shortage and that rents could take “years” to slow down to a pace similar to what they were rising at before the pandemic. He also noted that import prices are rising more rapidly, and that wages are still climbing too quickly to be compatible with 2% inflation in the medium term.
  5. The Fed chair acknowledged that data from the U.S. consumer price index report for May, released earlier on June 12, was encouraging, but that more data was needed before the Fed could conclude that 2% inflation in the medium term was achievable. He did not specify how many positive inflation readings in a row were needed before rate cuts could begin, stressing that the totality of the data would dictate the timing.

A Final Word

The June FOMC meeting, along with the May CPI report, were viewed by the markets as cautiously good news for risk assets, as evidenced by the positive response in equity and fixed-income markets on June 12. However, there are a number of structural factors, some of which were mentioned by Powell in the press conference, that may make a return to 2% inflation difficult. As we have previously noted, the strength of demand for goods and services in the United States, driven by a full-employment economy, is helping push prices higher. Deficit spending and a significant shortage in the supply of single-family housing also contribute to the persistence of higher-than-target inflation. 

How might investors respond to these conditions? In fixed income, one approach we favor is to diversify across duration exposures, including short-term bonds and credit-oriented instruments to balance the rate risk inherent in longer-term bonds. On the equity side, we think quality stocks, along with shares of rapidly growing, innovative companies, are also well positioned for the current environment.