The Federal Reserve is expected to leave interest rates unchanged on Wednesday, with new economic projections from the U.S. central bank’s policymakers likely to show fewer rate cuts this year than previously anticipated.

Fed officials received some welcome news on inflation as they continued their two days of deliberations when the Bureau of Labor Statistics reported that the consumer price index was flat on a month-to-month basis in May, and the annual pace of price increases slowed to 3.3% from 3.4% in the month before.

Excluding volatile food and energy costs, the core index slowed to 3.4% last month from 3.6% in April.

The Fed’s efforts to lower inflation to its 2% target had shown only modest improvement this year through April, and policymakers have been reluctant to put much weight on individual data points.

With strong job growth allaying concerns of a weakening economy, analysts expect the central bank to maintain its “no-rush” attitude towards rate cuts on Wednesday, leaving the benchmark policy rate in the 5.25%-5.50% range that was set last July.

But the low inflation read for May prompted investors at least to lock in views for a quarter-percentage-point rate cut in September and a second such move in December.

The Fed’s policy statement is due to be released at 2 p.m. EDT (1800 GMT), with Powell speaking to reporters half an hour later.

Given the slower progress on inflation this year, many analysts expect the Fed’s “dot plot” projection for its benchmark policy rate to show just two quarter-percentage-point rate cuts by the end of this year, versus the three anticipated as of March — if only to account for the lapse of time.

But the median could easily tip to only one cut among a nearly evenly divided group of policymakers. “If there is any risk … it’s that there will be only one 25-basis-point rate cut this year,” said Joe Brusuelas, chief economist for RSM US, with Powell using his press conference to “manage expectations” at a point where Fed policymakers feel particularly uncertain about the path the economy may follow.

‘Welcome deceleration’

Powell and other policymakers have minimized the risk of a further rate increase. The Fed aggressively raised rates in 2022 and 2023 after inflation surged to a 40-year peak.

The personal consumption expenditures price index, the Fed’s preferred inflation measure, has declined from a 7.1% peak annual pace in June 2022 to 2.7% as of April. The current policy rate is regarded as restrictive enough to discourage investment and spending and gradually return inflation to the Fed’s target.

Yet policymakers are not ready to commit to any cuts until they’ve seen more progress. Just as they acknowledge risks that unemployment could rise fast and warrant rate cuts to support the economy, they see aspects of inflation, particularly in housing and the broad services sector, that may have stalled at too high a level.

The latest CPI report could help allay that concern.

“Price pressures remain elevated but showed a welcome deceleration last month,” said Rubeela Farooqi, chief U.S. economist for High Frequency Economics.

Still, she added that “policymakers need to see more than one data point on inflation that shows a sustainable path towards 2% before cutting rates this year.”

—Howard Schneider, Reuters