Investing.com – While June was the month of the first interest rate cut in the Eurozone, things are different in the United States.
Today, the Fed will unveil its monetary policy decision, which is not expected to hold any surprises. According to Investing.com's Fed rate monitor, 98% of analysts believe that the American central bank will keep the benchmark rates unchanged between 5.25% and 5.50%. Additionally, today’s CPI data is expected to remain largely stable compared to April, with risks still tilted to the upside. Despite the downturn recorded in the first part of the year, the economy is expected to grow again in the second quarter.
In short, while several interest rate cuts were considered certain just a few months ago, the windows for these cuts are narrowing, and now markets are expecting two cuts this year, provided that inflation does not surprise on the upside, altering the outlook once again. As always, the final word rests with the bankers, particularly with Chairman Jerome Powell, who will speak after the release of the statement. To provide clarity and understand what to expect, Investing.com has gathered analysts' comments ahead of the Fed meeting on June 12.
Blerina Uruci, Chief US Economist, T. Rowe Price
We believe that the policy rate will remain unchanged: 5.25% - 5.5%. Regarding some general forecasts, we expect to see modest GDP growth, a slight decrease in the unemployment rate, and rising inflation for 2024.
I expect the next dot plot to show two rate cuts for 2024 (compared to the three projected in March). This is a widely agreed-upon choice, as it is generally believed that most FOMC members, including Powell, want to keep an option open for the September meeting. If the economy remains strong and inflation sticky, the market can price September based on data evolution.
However, I foresee that it will be difficult for many participants to decide on the dot plot, given the robustness of the labor market (see the May payroll report), and for this reason, I believe the risks are tilted toward a hawkish direction, meaning the dot plot could show only one cut this year. An upside surprise in CPI data would further increase the chances of a hawkish surprise.
The distribution of dots and the central tendency will also need to be observed. This will likely confirm a committee that is almost evenly split on the number of rate cuts expected this year, indicating a high degree of uncertainty about the monetary policy outlook.
After the May FOMC meeting, the JOLTS report suggested further cooling in the labor market, while employment was stronger than in April. Additionally, wage inflation slightly accelerated. At the same time, several GDP indicators suggest that growth in the second quarter could be more robust than the 1.3% pace of the first quarter. The conflicting data signals will result in greater monetary policy uncertainty. Specifically, whether monetary policy is sufficiently restrictive and if the Fed has much room to cut rates this year.
The consensus expects that the energy price drag will keep overall inflation contained, but core CPI is forecasted at 0.3% m/m and 3.5% y/y, still 150bp above the target. Moreover, overall inflation has remained almost flat since last summer. On Wednesday, I will be watching the costs related to residential real estate (shelter). The common view is that this measure will decline in the summer months. The FOMC will still need a slowdown in services ex-shelter to achieve its goal, but a drop in residential real estate costs would accelerate this process. If the residential sector does not slow down, I believe the FOMC will need to cut rates.
Analysts at Columbia Threadneedle Investments
The updates on inflation data and the Fed's policy meeting this week could influence market behavior ahead of the second quarter. We expect the Federal Reserve to keep rates unchanged on Wednesday. We believe that Chairman Powell and the committee will maintain a stance that emphasizes that potential rate cuts remain contingent on further progress in reducing price pressures as recognized by the Fed. Regardless of this week’s inflation data, consumer and producer price trends over recent months have shown mixed progress, reassuring Fed members about their position.
Erik Weisman, Chief Economist, MFS Investment Management
Another full-fledged Fed quarterly meeting. We will have the statement, the famous Fed "dots," the Summary of Economic Projections with forecasts for GDP, inflation, and the unemployment rate, and finally Chairman Powell's press conference. So, what should we expect?
Perhaps the most important thing will be to see if the Fed considers the April consumer inflation numbers low enough to be the first month of a series of weakenings. The Fed has stated it needs to see several consecutive months where inflation is much closer to "coming back into line" before starting to cut rates. It is unclear if the April CPI and PCE numbers were low enough to constitute month one in this process. We may get some clarification during the press conference.
Recently, both hard and soft macroeconomic data have been weaker and well below expectations. Considering the Fed’s dual mandate, will this weakening macro trend increase the Fed’s concern that the high policy rate is having an increasingly depressive effect on the economy? And could this accelerate the Fed's path toward beginning its rate-cutting cycle? Again, we may get some clarity on this during the press conference.
Another interesting point to examine is the long-term dots. This tells us what the Fed’s neutral nominal rate is. Last quarter, the long-term median dot increased for the first time in a while. Most market participants believe the long-term neutral nominal rate for Fed funds should be significantly higher. Will the Fed continue moving in this direction?
And as always, how many cuts does the Fed project for the rest of 2024, 2025, and 2026, and how does this align with market expectations? The market has fluctuated between predicting the first Fed cut for September or November. It will be interesting to see if the market moves more convincingly towards one starting point or the other after absorbing the Fed meeting.
Álvaro Sanmartín, Chief Economist, Amchor IS
Our macro and market outlook remains "cautiously constructive." In the United States, the significant rise in long-term rates since the beginning of the year will help moderate the growth of aggregate demand to rates more in line with the potential growth of the economy. Specifically, we anticipate expansion rates of around 2% for the entire 2024. In turn, a better balance between supply and demand, coupled with well-anchored inflation expectations, should allow for a gradual decline in core inflation in the coming months.
While we expect few rate cuts this year and next, we also consider it highly unlikely that the Fed will be forced to raise the cost of borrowing within the same timeframe.
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Richard Flax, Chief Investment Officer of Moneyfarm
The day promises to be packed with events for U.S. investors, with the release of the Consumer Price Index (CPI) results for May and, subsequently, the Federal Reserve's monetary policy decision.
The latest data on April inflation, after four consecutive months of increases, showed a gradual and continuous easing of price pressures, in line with analysts' expectations. For tomorrow, operators expect a slight decline in core inflation, which excludes the most volatile components like food and energy, from 3.6% to 3.5%, while overall inflation is expected to remain stable at 3.4%.
This would be another small step in the right direction, but it might not be enough: it appears that the rapid pace of price cooling seen last year has nearly halted, partly due to the strength of the U.S. labor market, which continues to fuel consumption despite high prices and financial burdens.
This scenario might push the Fed to maintain its wait-and-see approach: policymakers have repeatedly stated that data will guide the path of monetary policy and that without a significant downward movement in prices, it will not be possible to reduce the high financing costs in the country. With inflation well above the 2% target, the possibility that tomorrow's meeting will end with a rate cut is practically nonexistent. Analysts tend to predict that the first cut will occur only in September, followed by a second in December.
However, if the May inflation report shows a new surge in prices, traders may need to adjust their expectations, risking a drop in stocks and bonds.
Jack Janasiewicz, Portfolio Manager and Lead Portfolio Strategist, Natixis IM Solutions
The day looks busy: in the morning, U.S. Consumer Price Index (CPI) data for May will be released, while in the afternoon, the FOMC decision will take place. Although the forecast for both events has stirred the market, we do not expect excessive shocks but rather moderate outcomes. Specifically, regarding inflation, we expect the broader disinflationary trend to continue intact and that the more rigid first-quarter data will prove to be just a pause in a downward trend.
As for the Federal Open Market Committee, the June meeting is highly anticipated as the committee will publish the dot plot or Summary of Economic Projections (SEP). No change in the reference rate is expected, so all eyes will be on the dot plot as investors try to glean indications about the future path of interest rates.
We can imagine a scenario where the Fed adjusts its dot plots, simply signaling its forecasts to the market, essentially discounting the recent data relative to previous projections. For example, assuming core inflation continues to follow a monthly path with average increases of +0.2% through the end of the year, year-end core PCE (Personal Consumption Expenditures) would rise by about 30 basis points from the current projection. This inflation outlook revision is likely enough for the Fed to shift the 2024 dot plot upward to reflect only two cuts, compared to the three in the March dot plot edition.
Furthermore, if one committee member shifts their point higher by just one-eighth of a point for the 2024 federal funds rate, the median would also move higher. Overall, the 2024 median dot plot is likely to reflect only cuts by year-end, with the risk of moving to just one cut, depending on the distribution of FOMC members' estimates. A shift to two cuts would simply align with market pricing, while a dot plot showing only one cut risks surprising the markets unexpectedly compared to current consensus expectations.
In this context, it is crucial to interpret the data carefully, as this is largely a mechanical move rather than a real change in outlook or the Fed's reaction function. The SEP remains more a communication tool than an explicit policy forecast. As always, data drives decisions. The Fed is expected to remain cautious, emphasizing data dependence and the need for further evidence that the disinflationary trend is firmly in place before proceeding with rate cuts. This makes a September cut still on the table, provided the data trend in that direction.
Cassa Lombarda Advisory
Weak data on new job offers, along with weak PMI data and a downward revision of U.S. GDP, had fueled hopes of a more imminent Fed rate cut. However, late in the week, the May jobs report exceeded estimates: last month, 272,000 jobs were created (excluding the agricultural sector) compared to the previous month, while analysts had expected an increase of 190,000 jobs. Average hourly wages increased by 14 cents, or 0.40%, against an expectation of 0.30%; these latest data suggest a still very solid labor market and resilient wage inflation, with consequent expectations of a Fed holding back.
George Brown, Senior U.S. Economist, Schroders (LON:SDR)
We have revised our CPI estimates for 2024 upwards, from 2.7% to 3.1%, while leaving those for 2025 largely unchanged at 2.2% from the previous 2.1%. However, given that the risks to inflation remain strongly tilted to the upside, it is difficult to say whether we will see rate cuts from the Fed this year. Any easing will be contingent on definitive proof that inflation is converging toward the target. This will not only require a sequential slowdown in inflation but also depend on a better balance of labor market conditions.
Our baseline scenario assumes that progress on both fronts will be sufficient to give policymakers the confidence to cut rates. We expect the Fed to start the rate-cutting cycle in September, not June, and thus there will be only two cuts in 2024. For 2025, we continue to expect only one cut, based on our expectation that inflation will have reached the target by then and that the economy will be at full employment. There is still the risk that the cuts will be later and fewer, or that there will be none at all.
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