Fed Holds as Inflation Slows

Federal Reserve officials yesterday kept interest rates steady at a 23-year high and signaled they expect to reduce rates only once this year—fewer than the previous forecast of three cuts.

The central bank's announcement came as fresh government data showed the consumer price index, which measures changes in the cost of a basket of goods and services, remained flat month-over-month in May and rose 3.3% year-over-year, slightly better than expectations. While the latest annual inflation figure remains above the Fed's 2% target, it has fallen from a 9.1% peak in 2022, hovering between 3.1% and 3.5% since October 2023 (see chart).

The Fed has maintained the benchmark federal funds rate at 5.25%-5.5% for seven consecutive meetings after raising it 11 times since March 2022. Officials expect four rate cuts next year and four more in 2026—more than previously anticipated—to bring inflation to 3.1% by the end of 2026.

How does inflation work? (see video)