Washington (AFP) - The US Federal Reserve left its key lending rate unchanged on Wednesday and penciled in just one rate cut this year, down from the three expected in March.

The Fed voted unanimously to maintain its benchmark interest rate between 5.25 and 5.50 percent, and said that “modest” progress had been made toward its long-term inflation target of two percent.

The announcement suggests that central bank officials remain wary about cutting rates too soon, despite consumer inflation data published earlier Wednesday, which pointed to a slowdown in the rate of price increases in May.

The annual consumer price index (CPI) came in at 3.3 percent last month, down 0.1 percentage point from April and unchanged on a monthly basis, the Labor Department said. This was slightly below expectations.

Speaking after the rate decision was announced, Fed chair Jerome Powell welcomed the inflation data but added that the US central bank needs to see more “good inflation readings” before it gains sufficient confidence to consider cutting interest rates.

He added that the Fed is “prepared to maintain the current target range for the federal funds rate as long as appropriate,” if the US economy remains strong and inflation persists.

- Just one cut -

Alongside its interest rate decision, the Fed also updated economic forecasts from the members of its rate-setting Federal Open Market Committee (FOMC).

Policymakers lowered their individual forecasts for the number of rate cuts they expect this year, reducing the median projection for interest rates at end-2024 to the midpoint between 5.00 and 5.25 percent.

This means that FOMC participants only expect one 0.25 percentage point cut before year-end, two less than in the last update in March.

FOMC participants penciled in a median of four quarter percentage-point cuts for next year, and an additional four in 2026.

The announcement that the median number of cuts had been reduced to one caught some analysts by surprise, while others suggested the Fed would have to backtrack in the months ahead.

“The dropping of two of the easings previously expected this year is unnecessarily aggressive,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a note to clients.

He added that the Fed may have to backtrack due to a softening of the labor market of the summer and better progress on inflation.

“It will be a close call between one or two 25 bps rate cuts this year,” Wells Fargo economists wrote in an investor note, adding that their forecast remained for two cuts this year.

Ahead of Wednesday’s rate decision, many analysts had been expecting two cuts for this year, while some took the more pessimistic view on cuts.

“We think it’s probably going to be more out towards the end of the year,” Allianz Trade Americas senior economist Dan North told AFP before the Fed’s decision was announced, adding that he expects the first rate cut to come only in December this year.

“Inflation just seems like it’s really sticky, and it’s putting up quite a fight,” he continued, adding that the Fed “always waits too long before starting to cut rates.

In their economic forecasts, Fed officials also raised the median forecast for headline inflation this year to 2.6 percent, up 0.2 percentage points, and kept their growth outlook unchanged at 2.1 percent.

Following Wednesday’s inflation data, futures traders raised their expectations of an interest rate cut by mid-September to more than 70 percent, before dialing it back slightly following the Fed’s rate decision, according to data from CME Group.