The Federal Reserve surprised Wall Street on Wednesday afternoon, signaling that just one quarter-point rate cut is likely this year. The hawkish shift was all the more surprising because it came after May’s consumer price index delivered the best inflation news all year. The S&P 500 and Nasdaq had surged into record territory after the tame CPI data.

Fed Chair Jerome Powell will hold a news conference at 2:30 p.m.

Updated: 2:11 p.m.

Four Fed Hawks Want No Change This Year

Here’s another surprise: Fed policymakers weren’t quite as divided as they were in March. This time 11 policymakers expect a need for no more than one rate cut, while eight see two rate cuts as warranted. The majority of 11 included four hawks who prefer to keep policy in place at the current Federal funds target range of 5.25% to 5.5%.

This is a higher-for-longer interest rate outlook, with the Fed’s key rate holding above 4% for the next year and a half.

Updated: 2:05 p.m. ET

Fed Signals Just One Rate Cut In 2024

Policymakers’ dot-plot projections show the Fed’s benchmark interest rate falling to 5.1% this year, implying 25 basis points in rate cuts.

For 2025, Fed policymakers see a year-end rate of 4.1%, implying four additional quarter-point cuts.

The takeaway, which Fed chair Powell may not acknowledge, is that policymakers must be worried about an AI-fueled stock market melt-up that keeps inflation from heading back to target.

Despite the surprise, markets are hanging pretty tough.

While the stock market rally and the broad easing of financial conditions likely played a role in the hawkish shift, May’s strong jobs report surely played a role.

Updated 1:33 p.m. ET

S&P 500 Soars, Yields Dive Ahead Of Fed Announcement

The S&P 500 and Nasdaq rose sharply to fresh record highs ahead of the Fed announcement following tame May consumer price index data.

The S&P 500 jumped 1% while the Nasdaq composite leapt 1.7%.

The 10-year Treasury yield plunged 13 basis points to 4.27%, hitting its lowest level since April 1.

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Consumer Price Index (CPI) report and Producer Price Index (PPI) report measure the rate of change for consumer goods and services. On this IBD Explains, Jed Graham and Meredith Heyman break down what investors need to know about the data.” vid-name=”How The New CPI And PPI Reports Could Impact The Fed, Inflation And Interest Rates” vid-cat=”IBD Explains” vid-date=”06/11/2024″ vid-date-tmsp=”1718113496″ vid-image=”https://www.investors.com/wp-content/uploads/2024/06/xbd7Vscn-640×360.jpg” vid-authors=”MEREDITH HEYMAN”>
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The message from markets is that there’s nothing to fear from today’s Fed meeting, and that’s probably right. Fed Chair Jerome Powell, who will take to the podium at 2:30 p.m., has to be pleased by the cooling in inflation, especially services inflation.

Powell has held together a narrow majority of Federal Open Market Committee, or FOMC, members behind a cautiously dovish policy. The updated Fed rate-cut outlook reflects the median of individual projections made by each policymaker. The last batch of projections in March indicated that 10 committee members were forecasting three quarter-point cuts, while nine members saw two rate cuts or fewer.

The new projections are likely to show a similarly narrow majority backing two rate hikes. However, May’s 0.16% rise in the core CPI, the smallest monthly increase since August 2021, could signal the renewal of a disinflationary trend and help build a consensus. Still, Powell will make it clear that one inflation report isn’t nearly enough to give the Fed the confidence it needs to start cutting rates.

Ahead of the Fed update, markets are pricing in 73% odds of a quarter-point rate cut on Sept. 18, up from around 50% before the CPI. Wall Street now sees 72% odds of two quarter-point rate cuts before the end of 2024.

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