Federal Reserve Chair Jerome Powell reiterated during his June press conference that policymakers "want to gain further confidence" on inflation before considering interest rate cuts, slightly dampening market enthusiasm fueled by a lower-than-expected inflation report released earlier Wednesday.
"So far this year, the data has not given us that greater confidence. The inflation data received earlier this year were higher than expected, though more recent monthly readings have eased somewhat," Powell stated.
Powell welcomed today's reading but warned that upcoming inflation data may be "good but not [as] great" as the last one, given unfavorable base effects from the second half of 2023 which are likely to affect annual readings.
Powell somehow cooled investor excitement over today's reading: "That's a step in the right direction. But one reading is only one reading."
May Inflation Report Hasn't Altered Fed's New Inflation Outlook
Powell explained that Federal Open Market Committee (FOMC) members had the opportunity to update their inflation forecasts in the Summary of Economic Projections (SEP) following the new inflation data for May that was released this morning. However, the outcome of the SEP likely indicates that the majority of members generally left their opinions unchanged.
The projected median total Personal Consumption Expenditure (PCE) inflation for this year has risen to 2.6%, an increase from 2.4% in March. Next year's projection has also risen, now estimated at 2.3%, up from 2.2% in March. The projection for 2026 remains unchanged at 2.0%.
According to Powell, conditions in the labor market have returned into better balance, about where they stood on the eve of the pandemic, "relatively tight but not overheated."
When asked whether a September rate cut is feasible given the prospect of just one rate cut in 2024 (as indicated in the SEP), Powell stressed that any decision will be data-dependent, as the Fed does not make decisions about future meetings until they have all the necessary information.
Powell reiterated: "We don't see ourselves having the confidence that would warrant loosening policy," stressing the need to witness further positive inflation data in the coming months.
The Fed Chair also hinted that an "unexpected weakening in the labor market" would also encourage the Federal Reserve to cut interest rates.
"We don't want to wait things to break and then fix them," Powell said, indicating that the Fed will be highly attentive in monitoring the evolution of labor market data.
Market Reactions
Stocks slightly trimmed their session gains, while Treasury yields recovered from the sharp declines experienced earlier in the day, triggered by the May inflation report.
Market-implied expectations for a September rate cut slightly eased from about 70% to 63%. Traders continue to expect two fully priced rate cuts by December 2024.
The S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust (NYSE: SPY) was 0.8% higher at 3:30 p.m. ET, easing after hitting all-time highs earlier in the day.
The tech-heavy Nasdaq 100, tracked by the Invesco QQQ Trust (NASDAQ: QQQ) was 1.1% higher, cutting gains after it was 1.9% higher at 3:15 p.m. ET.
The yield on a 2-year Treasury bond traded at 4.76%, rebounding after hitting an intraday level as low as 4.67%.
The yield on a 10-year Treasury bond was 4.32%, bouncing off an intraday low of 4.25%.
Gold, as tracked by the SPDR Gold Trust (NYSE: GLD), erased all session gains, trading flat for the day.