U.S. Federal Reserve set to make interest rate decision. Here’s what to expect

U.S. policymakers are expected to project that they will cut their key interest rate just once or twice by year's end, rather than the three times they had envisioned in March.

Federal Reserve officials on Wednesday will likely make official what’s been clear for many weeks: With inflation sticking at a level above their two per cent target, they’re downgrading their outlook for interest rate cuts.

In a set of quarterly economic forecasts they will issue after their latest meeting ends, the policymakers are expected to project that they will cut their benchmark rate just once or twice by year’s end, rather than the three times they had envisioned in March.

The Fed’s updated economic forecasts, which it will issue Wednesday afternoon, will likely be influenced by the government’s May inflation data, released Wednesday morning. That report showed that inflation cooled unexpectedly. Overall prices were unchanged from April to May. And so-called core prices, which exclude volatile food and energy costs, rose just 0.2 per cent, the smallest monthly rise since October.

Measured from a year earlier, consumer prices rose 3.3 per cent in May, down from 3.4 per cent the previous month. Year-over-year core inflation slowed from 3.6 per cent in April to 3.4 per cent in May, the mildest annual pace in three years.

The Fed’s rate policies typically have a significant impact on the costs of mortgages, auto loans, credit card rates and other forms of consumer and business borrowing.

The downgrade in their outlook for rate cuts would mean that such borrowing costs would likely stay higher for longer, a disappointment for potential homebuyers and others.

Still, the Fed’s quarterly projections of future interest rate cuts are by no means fixed in time. The policymakers frequently revise their plans for rate cuts — or hikes — depending on how economic growth and inflation measures evolve over time.

But if borrowing costs remain high in the coming months, they could also have consequences for the presidential race. Though the unemployment rate is a low four per cent, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.