The Central Bank that sets U.S. monetary policy, the Federal Reserve (Fed), kept the benchmark interest rate unchanged at 3.50%–3.75% on the 17th local time. It was the fourth straight hold since January.
After cutting the benchmark rate by 0.25 percentage point each in September, October and December last year, the Fed held rates in January, March and April this year and left them unchanged again this time. As a result, the rate gap with Korea (2.50% a year) remained unchanged at 1.25 percentage points at the upper end.
◇ Median dot-plot raised to 3.8% from 3.4%
Markets had taken the Fed's rate hold as a given that day. Attention therefore focused on how the Fed would project next year's rate level through the dot plot. The dot plot is a chart marking with dots the anonymously submitted projections for the future policy rate by the 19 Commissioners.
In the dot plot released that day, the Fed effectively scrapped expectations for a rate cut within the year. Commissioners put the year-end median policy rate at 3.8%, higher than the 3.4% presented at the March meeting.
Of the 18 who submitted year-end policy rate projections, only one expected a rate cut, while nine projected rate hikes. Of the 19 Commissioners in total, one did not submit a projection, and markets see it as likely to be Chair Washi, who has taken a negative view of releasing rate projections.
The inflation outlook was also raised sharply. The Fed lifted its projection for the rise in the personal consumption expenditures (PCE) price index, the key gauge for policy decisions, to 3.6% from 2.7%. It also raised its forecast for core PCE, which excludes energy and food, to 3.3% from 2.7%.
In its statement, the Fed said, "Inflation remains above the Committee's 2% target, reflecting in part supply shocks from price increases in some institutional sectors such as energy," and added, "The Committee will work to achieve price stability."
◇ Washi starts Fed reform at first FOMC
This Federal Open Market Committee (FOMC) meeting was the first chaired by Washi since taking office on the 22nd of last month. As Washi had criticized the Fed for providing too much information to markets about rates, notable changes appeared in the Fed's communication after this meeting.
First, the length of the policy statement released right after the rate decision was cut to about half, and the forward guidance language hinting at the policy path was removed. Washi said, "We made it a little shorter and a little simpler and stripped out some of the old wording," adding, "We focused on the best facts we can judge."
At the press conference that day, Washi also minimized remarks about the economic outlook. Washi avoided specifics on the possibility or timing of rate adjustments. Questioning the practice of holding a press conference right after the meeting, Washi said, "Press conferences are useful, but at that time there must clearly be something important to say," signaling skepticism about the existing approach.
Washi also announced the launch of five task forces (TFs) to push Fed reforms that day. Each TF will study external communications, Fed balance sheet operations, sources of economic data, productivity and employment changes from the spread of artificial intelligence (AI), and the Fed's inflation target framework.