Signal released by the Federal Reserve: Hinting at a rate cut once this year, but remaining open to the possibility of two cuts

The softer US May CPI data sparked overnight market frenzy in US stocks, with the S&P and Nasdaq hitting new highs. Although the Fed tends to view the May CPI as a single data point and the June dot plot leans hawkish, the policy statement still acknowledges the progress in slowing inflation. Many market participants believe that the Fed remains open to two 25bp rate cuts this year.

The June rate decision showed that the Fed kept the benchmark rate in the 5.25% to 5.5% range for the seventh consecutive time, maintaining the new high for over 20 years. The dot plot indicates that nearly 80% of officials expect at least one rate cut this year, with the number of officials not expecting a cut doubling to four from March.

However, the post-meeting policy statement no longer mentions a lack of further progress in lowering inflation, but instead states that moderate further progress has been made, reiterating the need to be more confident in inflation reaching 2% before cutting rates.

Of particular note, Fed Chair Powell stated in the post-meeting remarks that the May core CPI inflation was "encouraging" and hinted that the dot plot may not fully reflect this positive factor. He explained that such data is typically received towards the end of monetary policy meetings, and "most people usually don't" update their forecasts in time.

Overall, Powell's post-meeting remarks, while cautious and downplaying the cooling of the May CPI data, still lean dovish:

Whether it is enough to suppress demand remains to be seen. But it is clear that monetary policy has tightened and is having the desired effect.

Among the voters, Dallas Fed President Kaplan believes that higher rates may not have been as restrictive to the economy as previously expected. New York Fed President Williams, on the other hand, insists that the current policy stance is conducive to bringing inflation down to the Fed's target level.

Kathy Bostjancic, Chief Economist at Nordea Mutual Insurance Company, told the media:

The Fed may still cut rates twice starting in September this year, but they need data support to boost confidence. It is understandable to be conservative, as they tend to be cautious. However, I believe the door to rate cuts remains open.

The CME FedWatch Tool shows that currently, the probability of a rate cut at the September meeting exceeds 60%.