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Federal Reserve Adjusts Interest Rate Cut Forecast and Raises Inflation Expectations for 2024

The Federal Reserve has adjusted its forecast to include just one interest rate reduction of 0.25 percent this year, a shift from its previous prediction of three such cuts. This update was provided in the central bank's most recent summary of economic projections.

For 2024, the Fed has raised its expected annual inflation rate to 2.6 percent from an earlier forecast of 2.4 percent. This adjustment is partly due to an increase in the core inflation rate—from 2.6 percent to 2.8 percent—which excludes the typically more volatile food and energy sectors. This measurement is based on the Commerce Department’s personal consumption expenditures (PCE) price index.

Looking ahead, the Fed predicts that inflation will decrease to 2.3 percent in 2025 and further decline to 2 percent by 2026.

The unemployment rate forecast remains steady at 4 percent, consistent with its level following a slight rise in May.

Projections for the growth of the gross domestic product (GDP) remain unchanged at 2.1 percent for the year.

Despite earlier optimism from investors regarding potential additional rate cuts—which would reduce borrowing costs and potentially boost the stock market—recent strong employment data and some high price figures earlier in the year have tempered these expectations.

The economy saw a significant job addition in May, with 272,000 jobs created, far exceeding the anticipated 190,000. This was accompanied by a slight increase in the unemployment rate to 4 percent from 3.9 percent.

Inflation saw a peak in March at 3.4 percent but has shown signs of decrease in the following months, with the consumer price index (CPI) recording a 3.3 percent annual increase in its latest reading, influenced partly by falling grocery prices over four consecutive months.

Interest rates were maintained at a range of 5.25 percent to 5.5 percent by the Fed in its latest decision.

The Fed's rate-setting committee noted that risks associated with achieving its employment and inflation objectives have become more balanced over the past year, although it characterized the progress as modest.

In the housing sector, inflation remains notably high at 5.4 percent, leading to subdued activity in home purchases and sales in recent months.


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