Markets have appeared to be overly optimistic about the prospects for summer rate cuts from US Federal Reserve policymakers so far this year. Heading into Wednesday’s announcement, observers will try to glean further information from both the updated staff forecasts and Chairman Jerome Powell’s press conference.
The Federal Open Market Committee (FOMC) is widely expected to keep the benchmark interest rate within its range of 5.25% -5.50%.
Commentators said they expect Powell to dial down the rhetoric surrounding a summer reduction in borrowing costs as the central bank continues to classify current cost pressures as elevated.
The US is scheduled to release its May Consumer Price Index (CPI) just hours ahead of Wednesday’s central bank decision, adding an extra layer of complexity to the trading day.
“Wednesday will be a rare event for market participants given that the May CPI report will precede the conclusion of the FOMC meeting,” Brett Ryan of Deutsche Bank said. “Indeed, the latest inflation data will undoubtedly factor into Fed officials' updated estimates in their Summary of Economic Projections (SEP) and could influence the tone of the meeting should there be any meaningful surprises.
“With seasonally adjusted gas prices down almost 2% from April, we expect headline CPI to come in softer than core.”
Inflation data on tap
The May CPI report is set for release at 12:30 GMT /08:30 EST. With weaker services as the main driver, analysts said they expect the headline rate to slow to 0.1% m/m in May from 0.3% in the previous month. On an annual basis, the index is forecast at 3.4%, which would be unchanged from April. The core measure excludes food and energy inputs and is estimated to have slowed to 3.5%, a tenth lower than previously.
Within the report, analysts look for core services prices to remain elevated, continuing the recent trend. While core goods prices are expected to decline, in part weighed down by a drop in used cars.
Adjusted SEP
Amended economic projections by Fed staff areexpected to reflect a downgrade to the GDP growth outlook. At the same time, core PCE prices are likely to be adjusted higher, with central bank number crunchers anticipated to add a tenth to the unemployment rate target for the end of 20254. Longer run estimates are expectedto remain close to March figures, observers noted.
“Updated SEP forecasts are likely to revise core PCE inflation higher this year (2.8%), motivating the shift in the median dot from three rate cuts to two,” Deutsche Bank’s Ryan predicted. He explained that officials are expectedto be closely split on the outcome, iebetween two cuts and fewer. “A desire to maintain optionality for a reduction bySeptember should tip the median towards two, assuming May CPI does not surprise to the upside.”
CIBC’s Ian Pollick added, “Given that we expect the SEP to largely be a mark-to-market, we believe the market impact will be relatively minor compared to prior meetings. Specifically, a lot of the movements in the forecasts will bring the Fed broadly in line with market expectations. Moreover, the distribution of easing will also be brought closer to market expectations.”
Press conference
The Fed chair’s recent post-decision press conferences have often been described as dovish, a point with which BofA’s Alex Cohen concurred. “Since the Fed last hiked rates [mid-2023] this ensuing hold period (inclusive of the 23 July meeting) it has held seven meetings, with five of those interpreted as ‘dovish’, mainly due to Powell's commentary in the press conferences.
“With this context in mind going into Wednesday's Fed, the balance of data and chair Powell's seeming preference to still want to cut rates as soon as possible, it is difficult to envision him intentionally shifting to a more hawkish tone, even despite the May Employment Report, and lack of more intense disinflation readings.”
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- FOMC to hold benchmark rate at 5.25%-5.50%
- Few changes likely for policy statement
- Powell expected to stick with dovish undertone
- Rate decision due Wednesday at 18:00 GMT/14:00 EST
- Press conference set for 18:30 GMT/14:30 EST
By Harry Daniels
LiveSquawk News
@HarryDaniels71
11 June 2024 | 12:00 GMT
Markets have appeared to be overly optimistic about the prospects for summer rate cuts from US Federal Reserve policymakers so far this year. Heading into Wednesday’s announcement, observers will try to glean further information from both the updated staff forecasts and Chairman Jerome Powell’s press conference.
The Federal Open Market Committee (FOMC) is widely expected to keep the benchmark interest rate within its range of 5.25% -5.50%.
Commentators said they expect Powell to dial down the rhetoric surrounding a summer reduction in borrowing costs as the central bank continues to classify current cost pressures as elevated.
The US is scheduled to release its May Consumer Price Index (CPI) just hours ahead of Wednesday’s central bank decision, adding an extra layer of complexity to the trading day.
“Wednesday will be a rare event for market participants given that the May CPI report will precede the conclusion of the FOMC meeting,” Brett Ryan of Deutsche Bank said. “Indeed, the latest inflation data will undoubtedly factor into Fed officials' updated estimates in their Summary of Economic Projections (SEP) and could influence the tone of the meeting should there be any meaningful surprises.
“With seasonally adjusted gas prices down almost 2% from April, we expect headline CPI to come in softer than core.”
The May CPI report is set for release at 12:30 GMT /08:30 EST. With weaker services as the main driver, analysts said they expect the headline rate to slow to 0.1% m/m in May from 0.3% in the previous month. On an annual basis, the index is forecast at 3.4%, which would be unchanged from April. The core measure excludes food and energy inputs and is estimated to have slowed to 3.5%, a tenth lower than previously.
Within the report, analysts look for core services prices to remain elevated, continuing the recent trend. While core goods prices are expected to decline, in part weighed down by a drop in used cars.
Amended economic projections by Fed staff are expected to reflect a downgrade to the GDP growth outlook. At the same time, core PCE prices are likely to be adjusted higher, with central bank number crunchers anticipated to add a tenth to the unemployment rate target for the end of 20254. Longer run estimates are expected to remain close to March figures, observers noted.
“Updated SEP forecasts are likely to revise core PCE inflation higher this year (2.8%), motivating the shift in the median dot from three rate cuts to two,” Deutsche Bank’s Ryan predicted. He explained that officials are expected to be closely split on the outcome, ie between two cuts and fewer. “A desire to maintain optionality for a reduction by September should tip the median towards two, assuming May CPI does not surprise to the upside.”
CIBC’s Ian Pollick added, “Given that we expect the SEP to largely be a mark-to-market, we believe the market impact will be relatively minor compared to prior meetings. Specifically, a lot of the movements in the forecasts will bring the Fed broadly in line with market expectations. Moreover, the distribution of easing will also be brought closer to market expectations.”
The Fed chair’s recent post-decision press conferences have often been described as dovish, a point with which BofA’s Alex Cohen concurred. “Since the Fed last hiked rates [mid-2023] this ensuing hold period (inclusive of the 23 July meeting) it has held seven meetings, with five of those interpreted as ‘dovish’, mainly due to Powell's commentary in the press conferences.
“With this context in mind going into Wednesday's Fed, the balance of data and chair Powell's seeming preference to still want to cut rates as soon as possible, it is difficult to envision him intentionally shifting to a more hawkish tone, even despite the May Employment Report, and lack of more intense disinflation readings.”