Federal Reserve pauses but projects two more rate hikes this year

In line with investor expectations, the Federal Reserve decided to pause its interest rate hike campaign at its June Federal Open Market Committee meeting. However, the Fed's Summary of Economic Projections indicates the central bank will pass another two rate hikes this year. The current interest rate target of 5% to 5.25% would reach the terminal rate of at least 5.5% to 5.75% by the year's end, according to the overwhelming majority of meeting participants.

The median federal funds rate for next year was revised upward from 4.3% to 4.6%. For 2025, it was revised upward from 3.1% to 3.4%. This would translate to just 1% point of cuts next year and 1.2% after that.Just one month ago, investors were banking on the Fed instituting multiple rate cuts throughout this year, starting as early as September. Now, futures markets have priced in a more than 3-in-4 chance of a 25-basis-point hike by September.

Unlike FOMC meetings past, markets finally appear ready to take the Fed at its word, if only because increasing core inflation has defied expectations and diverged from headline inflation, which has largely abated in response to resolved supply chains over the past year. It's fully possible that the pause results in core inflation cooling down — after all, producer price inflation, a leading indicator of consumer price inflation, has quickly and surprisingly cooled.

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