The Federal Reserve is expected to keep rates unchanged as high inflation diminishes the likelihood of rate cuts
The Federal Reserve concludes its two-day policy meeting today, with the release of a new statement and remarks from Chair Jerome Powell expected to shed light on how recent disappointing inflation data have impacted expectations for interest rate cuts this year.
The Fed is almost certain to keep its benchmark overnight interest rate unchanged, with investors almost unanimously expecting this outcome, and officials providing no signals of policy rate changes before the meeting.
However, the policy statement and Powell’s press conference should clarify how recent setbacks in the inflation battle have influenced the timeline for potential reductions in borrowing costs.
Fed policymakers will not be updating their quarterly economic projections at this meeting, so any new guidance will come from the statement and Powell’s remarks.
The Fed made considerable progress in bringing inflation down towards its 2% target after reaching a 40-year high in 2022. However, progress has stalled this year and even shown signs of reversal, prompting central bank officials to temper expectations of imminent rate cuts.
As the Fed’s latest meeting commenced on Tuesday, two data releases further cast doubt on the outlook.
The Employment Cost Index (ECI), a key measure of labor market conditions, showed a 4.2% year-over-year increase in the first quarter, consistent with the fourth quarter’s rate and above what aligns with the Fed’s inflation target.
Additionally, two national measures of home prices demonstrated unexpected strength, undermining the Fed’s longstanding hopes that easing shelter inflation would help lower the overall inflation rate.
Investors in contracts tied to the Fed’s policy rate responded to the data by pushing back their expectations of when rates might decline, according to data from CME Group’s FedWatch Tool. The possibility of an initial quarter-point rate cut at the Fed’s September 17-18 meeting was approximately even odds as of Tuesday.
The probability that the benchmark rate will remain unchanged within the current 5.25%-5.50% range this year was around one in four, an increase from nearly zero in early April.
The Fed last raised rates in July, and while officials have indicated they are unlikely to hike again, Powell’s assessment of this issue at his press conference will be significant, even if he simply reaffirms that the current policy rate is expected to remain steady for a longer period than initially anticipated.
Powell’s comments on April 16, his most recent public remarks prior to this week’s meeting, emphasized the need to give restrictive policy more time to take effect, acknowledging that recent data have not increased the Fed’s confidence in achieving its goals more quickly and that maintaining the current stance is appropriate given the strong labor market and progress on inflation.
