U.S. Fed holds interest rates steady, sees just 1 cut in 2024 despite inflation progress

U.S. Federal Reserve officials said Wednesday that inflation has fallen further toward their target in recent months, but signalled that they expect to cut their benchmark interest rate just once this year.

The policymakers' forecast for one rate cut was down from a previous forecast of three, likely because inflation remains persistently elevated.

In a statement issued after its two-day meeting, the Fed said that the economy is growing at a solid pace while hiring has "remained strong."

The Fed also said that in recent months there has been "modest further progress" toward its two per centinflation target. It'sa more positive assessment than after its previous meeting May 1, when officials said there had been "a lack of further progress" on inflation.

The policymakers, as expected, kept their key rate unchanged Wednesday at roughly 5.3 per cent. The benchmark rate has remained at that level since July of last year, after the Fed raised it 11 times to try to slow borrowing and spending and cool inflation.

Fed rate cuts would, over time, lighten loan costs for consumers, who have faced punishingly high rates for mortgages, auto loans, credit cards and other forms of borrowing.

The officials' rate-cut forecast reflects the individual estimates of 19 policymakers.

The updated quarterly projections are by no means fixed in time, however, with policymakers frequently revising their plans for rate cuts or hikes depending on how economic growth and inflation measures evolve over time.

Inflation numbers were 'welcome,' says Powell

On Wednesday morning, the government reported that inflation eased in May for a second straight month, a hopeful sign that an acceleration of prices that occurred early this year may have passed.

"We welcome today's reading and hope for more like that," Fed chair Jerome Powell said at his news conference.

Though inflation has tumbled from a peak of 9.1 per centtwo years ago, it remains too high for the Fed's liking. The policymakers now face the delicate task of keeping rates high enough to slow spending and defeat high inflation without derailing the economy.

The Fed, BOC diverge on interest rates

With monetary policy at the Fed and the Bank of Canada now diverging, experts say it could set the Canadian dollar up for volatility down the road.

If the Bank of Canada's rate falls too far below the Fed's, it could negatively affect the loonie, said Allan Small, senior investment adviser at IA Private Wealth.

This would make imports from the U.S. Canada's biggest trading partner more expensive and put upward pressure on inflation, though this isn't something that happens overnight, Small said.

"If the Bank of Canada cuts a few times and the Fed stands pat, I don't think that will be an issue," he said.

But if the Bank of Canada keeps cutting and the Fed holds on past the first quarter of next year, "then we could start to see significant divergence."