With measures of inflation remaining above its 2% target, the Federal Open Market Committee (FOMC) continued its approach to keep rates higher for longer at its June meeting. As widely anticipated, the FOMC maintained policy at its current target range of 5.25% to 5.50%, keeping rates at a two-decade high for the seventh consecutive meeting.

In the face of such restrictive policy, economic growth and the labor market have been resilient but are showing signs of moderation.  Economic growth decelerated in the first quarter as gross domestic product increased by 1.3% versus 3.4% for the previous quarter.  Nonetheless, spending continues to show strength as personal consumption and private fixed investment rose by 2.8%.  Growth in nonfarm payrolls surpassed expectations for May with an increase of 272,000, but results from the household survey may suggest a more moderate pace of job creation.  In addition, the unemployment rate increased to 4.0%, continuing to tick higher from its post-pandemic lows.

Alongside this moderation, recent releases on inflation have shown signs of further progress.  The Consumer Price Index beat expectations and continued to cool in May as the core measure increased by 3.4% on a year-over-year basis, its slowest pace since inflation initially surged higher.  In addition, the Producer Price Index for May also beat expectations declining by the most it has in seven months.  But despite progress made to date, the FOMC continues to reiterate that it needs more confidence before reducing its target policy rate.  To that end, additional positive inflation will likely be an important precursor to the start of any shift towards easing policy.

So while recent developments may pave the way for the start of a rate-cutting cycle, the last mile in the battle against inflation may prove challenging.  Therefore, the FOMC remains data dependent and the totality of incoming data will continue to be a key catalyst for monetary policy going forward.