Fed foresees only one rate cut in 2024


Federal Open Market Committee (FOMC) met this week and decided to keep interest rates unchanged. The Fed forecast that interest rates will end 2024 higher than they predicted in recent forecasts and will decline more slowly in 2025.

The FOMC meets 8 times per year but only releases an economic forecast at 4 of the meetings. The Fed forecast presents estimates for economic metrics for December of each year through 2026, and a “longer run” forecast which reflects their view of the output of the economy if operating at equilibrium. The consensus Fed forecast is developed by combining the forecasts of 19 economists. Each of the economists assumes that the Fed will follow “appropriate” monetary policy during the term of the forecast, although their individual ideas of what that policy is may vary.

The forecasted estimates for the various economic metrics are based on the medians of the estimates of the 19 economists who participate in the FMOC meeting.

Interest rates to decline slowly

The headline news coming out of the recent Fed meeting was their decision to again keep interest rates unchanged for now. However, they raised their estimate of the appropriate Federal Funds interest rate for year-end 2024 from 4.6 percent to 5.1 percent. With the current Fed Funds target interest rate range at 5.25 to 5.5 percent, this implies that the rate will see only a single 0.25 percentage point cut by the end of the year.

The Fed now projects that the appropriate Federal Funds rate for 2025 will be 4.1 percent, up 0.2 percentage points from their March forecast.

The Fed’s prediction of the appropriate Federal Funds rate for 2026 is 3.1 percent, unchanged from the rate projected in the March forecast. However, the projection for the long-run equilibrium interest rate was raised again in the current forecast, rising 0.2 percentage point to 2.8 percent.

A history of the forecasts for the Federal Funds rate is given in the first chart, below.

fed forecast for interest rate federal funds rate

Inflation outlook raised

The Federal Reserve’s preferred inflation measure is based on the Personal Consumption Expenditures (PCE) survey, rather than the more familiar Consumer Price Index (CPI). Compared to March’s forecast, the year-end reading for PCE inflation for 2024 was raised 0.2 percentage points to 2.4 percent. The year-end reading for 2025 was raised 0.1 percentage points to 2.3 percent. The projection for year-end inflation for 2026 remained at 2.0 percent, the Fed’s target.

The history of the Fed’s recent PCE inflation forecasts is shown in the next chart.

fed forecast for PCE inflation

GDP growth projections unchanged

The Fed’s median forecasts for GDP growth were unchanged across the board despite the Bureau of Economic Analysis’s second estimate of Q1 2024 GDP coming in lower at an anemic 1.3 percent. However, while the median GDP growth forecasts for 2024 and 2025 were unchanged, the average of the 19 individual forecasts edged slightly lower.

Recent Fed GDP forecasts are illustrated in the next chart, below.

fed forecast for GDP growth

Unemployment higher in 2025 and 2026

The Fed forecasts that the year-end unemployment rate will be 4.0 percent in 2024, unchanged from March’s forecast. The unemployment rate forecast for year-end 2025 is up 0.1 percentage point from March’s forecast at 4.2 percent and the forecast for 2026 was also revised 0.1 percentage point higher to 4.1 percent.

The history of the Fed’s recent unemployment rate forecasts is shown in the next chart.

fed forecast for unemployment

The next updates to the Federal Reserve’s forecasts for the economy will come after the September 2024 FOMC meeting which concludes on the 18th of that month.