18 06 2024

It's almost a sure bet the Fed won't lower rates at its June meeting. So when will it?

Virtually no one expects the Federal Reserve to lower interest rates when officials conclude their two-day meeting Wednesday. But economists and investors will be looking for clues as to when the central bank finally could cut its key rate and how many times it might do so this year.

The Fed’s benchmark, short-term rate has stood at a 23-year high of 5.25% to 5.5% since July as the Fed waits for inflation to cool further. Annual inflation dipped in April to 3.4% from 3.5% the prior month – far below the two-decade high of 9.1% in June 2022, but still above the Fed’s 2% goal.

Most economists have scaled back their rate cut predictions to two, one or none this year after inflation accelerated early this year. A few, including Minneapolis Fed President Neel Kashkari, have even suggested a rate hike is a slim possibility.

Coming into the year, many economists had predicted rates would already be falling. They expected as many as six or seven rate cuts this year.

Interest rates are the main tool the Fed uses to lower inflation. High rates make borrowing more expensive, which slows spending and the economy, generally easing inflation.

When will inflation cool enough for the Fed to cut rates?

Odds for a first cut in July are below 10%, but futures markets are still betting on one cut this year, probably in September as inflation resumes a gradual pullback in the months ahead, according to the CME FedWatch Tool, which measures market expectations for changes in the fed funds rate.

Wednesday’s so-called dot-plot, released by the Fed four times a year, will show each member’s fed funds rate forecast. The median forecast in March was three rate cuts this year.

Fed officials have since admitted inflation’s been surprisingly slow to drop, and economists expect the Fed to pencil in fewer rate cuts this time. But whether it’ll be one or two is a close call.

How important is May inflation data?

The May consumer price index (CPI) is due just hours before the Fed’s meeting ends, and hotter-than-expected inflation data could influence the Fed’s rate cut forecasts, economists said.

“We think the Fed leadership would prefer ... to show two cuts in 2024 to retain flexibility,” wrote David Mericle, Goldman Sachs economist, in a report. “But the key risk is that the median could instead show just one cut in 2024, especially if the May core CPI print comes in well above” forecasts.

Bank of America economists forecast overall inflation to rise 3.4% in the 12 months to May and the so-called core rate that excludes food and energy to gain 3.6%.

Others were less optimistic for any rate cut, no matter the data. “I don’t think we’re even going to get one this year,” said David Lynd, chief executive at real estate company The Lynd Company. “We need to get inflation under control or else no consumers will have any purchasing power left and things will get worse.”

Why is inflation still so high?

One of the “uncontrollable” inflation components is rent, which remains high and accounts for about a third of the basket of goods and services used to calculate the consumer price index, said Stephen Bittel, founder and chairman of Terranova Corporation, an alternative investment firm specializing in commercial real estate.

Last month, Fed Chair Jerome Powell at a conference in Amsterdam called housing inflation “a bit of a puzzle.” Measures of new apartment leases show rents for new leases barely increasing. That hasn't been reflected in government data that mostly captures renewals of existing leases, but it's expected to filter through in coming months.

Friday’s surprisingly strong 272,000 nonfarm payrolls gain in May and 4.1% year-over-year jump in wages also “should drive a rebound in consumer spending,” said Nationwide chief economist Kathy Bostjancic. That “could help keep inflation more buoyant and delay Fed rate cuts to later this year or into next year.”

Could the Fed feel pressure to cut rates in step with Canada and Europe?

"Publicly the Fed has to say there's no pressure but privately, it might be a consideration," Bittel said, noting businesses may head abroad to borrow at a cheaper rate. Last week, the European Central Bank and Bank of Canada each lowered their key rates by a quarter point.

But to safeguard consumer purchasing power, the Fed needs to stay focused on lowering inflation, experts say.

"The average person is going through hell," Lynd said. "Inflation is ravaging the consumer. They're out of money, used up their credit cards, borrowing from mom and dad. There's not a lot left with inflation not going down."

Minneapolis Fed President Kasharki says consumers “viscerally hate high inflation” and prefer recession over inflation. "High inflation affects everybody. There’s no one I can lean on for help because everyone in my network is experiencing the same thing I’m experiencing."

And there's still a risk that high inflation could persist. "The economy has repeatedly surprised to the upside since the Fed stopped hiking and began forecasting cuts," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.

What else will people be watching from the Fed meeting?

Along with the dot-plot, the Fed will also release its economic projections. Most economists see little change from March.

Morgan Stanley and Wells Fargo expect the Fed to keep its economic growth for the year around 2.1% but bump up its projected 4% unemployment rate to 4.1% or 4.2%.

To reflect the slower-than-expected cooling of inflation, most economists expect the Fed to raise its inflation outlook. The Fed forecast in March its preferred inflation gauge, core PCE, to be at 2.6% at year-end. Economists predict the Fed will raise that Wednesday to between 2.7% and 2.9%.



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