Interest rate cuts unlikely in June

The U.S. economy still hasn't slowed to the Federal Reserve's satisfaction, so don't expect the Fed to cut interest rates at its June meeting, said Ryan Loy, extension economist for the University of Arkansas System Division of Agriculture.

In a news conference at the beginning of May, Fed Chairman Jerome Powell expressed frustration about the lack of downward progress toward the Fed's objective of two percent inflation.

"We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent," Powell told reporters. "So far this year, the data have not given us that greater confidence. In particular, and as I noted earlier, readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected."

Powell said in his May 1 news conference that "I don't see the stag, or the 'flation," he said.

The Fed instituted 11 interest rate hikes — seven in 2022 and four in 2023 — to quell the economic growth spurred by its COVID-era interest rate reductions.

Inflation, in terms of the Consumer Price Index, or CPI, has fallen from its post-COVID peak of 9.1 percent in June 2022 and further declined to 3.1 percent in November. However, inflation climbed to 3.5 percent in March 2024. This CPI inflation measure gives the percentage change from the previous year. For example, the CPI increased 9.1 percent between June 2021 and June 2022.

"At this point, we were supposed to be in a better spot," Loy said, "But we're still in a strong economic climate. However, it's an economic climate in which inflation rises with growth, which is essentially the definition of 'stagflation'."

What's keeping the economy bubbling along? Consumers continue to make purchases, and the April employment report showed the addition of 175,000 jobs.

"People are still buying even with highly inflated prices," Loy said. "I remember when people were freaking out when gas got to $3 a gallon. My dad wouldn't drive anywhere. But now it's $3.15 at the pump and nobody says anything."

Loy said he didn't know at what point inflation might slow consumer spending.

"There's just a lot of things working against the Fed right now," he said.

At the crossroads

The next milestones will be the May 31 release of the Personal Consumer Expenditure index, or PCE, by the Bureau of Economic Analysis, part of the U.S. Department of Commerce; and the Fed's next meeting June 1-2.

The PCE offers a snapshot of inflation across a wide range of consumer expenses and reflects changes in consumer behavior. Unlike its cousin the Consumer Price Index, the PCE does not include highly volatile items such as food and energy prices.

Loy said The PCE index inflation rate is at the core of the Fed's 2 percent objective. While close, the PCE index inflation rate has been nearly motionless, lingering at 2.9 percent for months and finally, "in March, the PCE was at 2.8 percent, down 0.1 percent since January."

He said the Fed might be thinking "if it's not going to move, we don't want to raise interest rates anymore, because our labor market is showing signs that it's being impacted by inflation."

Loy said the CME Group — which operates the Chicago Board of Trade and other key exchanges — was forecasting a 91 percent chance the Fed would hold rates steady when it meets June 1-2. The June meeting is also when the Fed will release its Summary of Economic Projections.

"The Fed is at a crossroads again. What do they do? Do they wait it out? Because at some point, something's going to have to shake it loose," Loy said.

"The Fed's economic projections will tell us what they expect for the rest of the year, and based on that expectation, we'll have a better idea as to where these interest rates can go, or how they're going to treat their balance sheet," he said. "They're just trying to get back to the point they were pre-COVID."