The Federal Reserve kept interest rates unchanged on Wednesday, but in a hawkish surprise the central bank now sees just one rate cut for the year, as inflation is expected to trend higher than previously expected.

The Federal Open Market Committee, the FOMC, kept its benchmark ratein a range of 5.25% to 5.5%.

While the unchanged decision, the eighth in a row, was largely expected, Fed members now believe that fewer rate cuts are needed this year.

Fed members now see the benchmark rate falling to 5.1% this year, suggesting just one rate cut in 2024, compared with a prior estimate in March for three cuts. In 2025, Fed members see the rates falling to 4.1%, up from a prior forecast for 3.9%, before eventually declining to 3.1% in 2026.

There outlook of one rate cut wasn’t one shared by everyone on the committee, with four committee members backing no cuts this year.

“The shifts in the projections of the Fed’s SEP are more hawkish than we anticipated,” Economists at Jefferies said in a Wednesday note following the decision.

In a sign that members are worried about whether policy will be restrictive in the long run, the Fed lifted its forecast on the neutral rate, one that neither stimulates nor restricts economic growth, to 2.8% from 2.6% previously.

The path to fewer expected rate cuts for the year come as the central bank lifted its forecasts on inflation following a string of upside surprise in Q1.

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The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, is forecast to be 2.8% in 2024, up from a prior forecast of 2.6%. For 2025, inflation is estimated to be 2.3%, up from 2.2% previously.

The stickier outlook on inflation wasn’t accompanied by expectations for stronger economic growth as central bank members left gross domestic product, or GDP, forecasts unchanged at 2.1% for this year and 2% for the next.

On the labor market, meanwhile, unemployment rate seen at 4% this year, unchanged from a prior forecast in March, but is now expected to pick up pace to 4.2% next year, up 0.1% from a prior projection of 4.1%.

Stocks were largely unchanged on the news, with S&P 500 hovering near record levels as data earlier on Wednesday, showing consumer inflation slowed more than expected in May, buoyed optimism that the disinflation trend remains on track.

In his press conference, Fed Chairman Powell acknowledged the cooler than expected inflation data, but said the committee would continue to monitor the incoming data to establish a trend.

The Fed chief was pressed on how many months of data showing inflation was slowing would be needed to trigger a rate cut. But “unsurprisingly Powell dodged a question about a potential September rate cut and would not commit to any future moves in interest rates,” Jefferies added.

Others, however, flagged Powell remarks that the Summary of Economic projections, or so-called dot plots, on inflation were “conservative” as a sign that the door for more than one cut remained open.

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“We interpreted this as suggesting that the Fed chair … is keeping the door very much open to a September cut provided that the May downshift is broadly sustained in the next few months,” Evercore ISI said in Wednesday note.

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