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What To Expect From This Week’s Fed Meeting on Interest Rates

What To Expect From This Week's Fed Meeting on Interest Rates

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When the Federal Reserve delivers its policy decision on Wednesday, it is expected to maintain its benchmark interest rate in its current range of 5.25-5.5%.
The Fed keeps interest rates high to contain inflation at the expense of cooling the economy, and officials are committed to maintaining them until inflation is under control.
With little probability of rate change in any way, Wednesday’s statement will disclose more about how Fed members see the prospects for rate reduction later this year.

Don’t anticipate the Federal Reserve to modify its monetary policy, but Wednesday’s Federal Open Market Committee meeting may give insight into when the central bank could cut interest rates.

When the Fed’s policy-setting committee wraps up its two-day meeting on Wednesday, the key Fed funds rate will likely remain in its current range of 5.25-5.50%. That is a 23-year high, and it has been there since last July to keep inflation under control.

Rates Are Not Likely to Budge Fed

Financial markets would be taken aback if the Fed raised interest rates to further compress inflation or cut them to encourage the economy. According to the CME Group’s Fed watch Tool, which anticipates rate changes based on Fed funds futures trading data, traders are mostly pricing in a September rate decrease at the earliest

Traders reduced their bets on a September drop to 50.8% on Friday, down from 68.7% the day before, following a Bureau of Labor Statistics report that showed the labor market was hotter than expected in May, implying that salaries and job growth were exerting upward pressure on inflation.

“The strength of the labor market is providing the Federal Reserve cover to wait for better inflation news before signaling a rate cut, but the central bank cannot take that strength for granted or as a given,” stated Oxford Economics Chief U.S. Economist Ryan Sweet.

Any movement in the crucial interest rate would also contradict central bank officials’ recent public pronouncements, which have indicated a willingness to keep the fed funds rate higher for longer.

Fed policy committee members have stated that they will not contemplate decreasing their main interest rate, which effects borrowing rates on all types of loans, unless they are confident that inflation is firmly on a road to an annual rate of 2% or below.

Recent indications of slowing inflation may have alleviated concerns that price rises are rising. However, it is unlikely to have persuaded policymakers that inflation has been eliminated, keeping the Fed in a holding pattern.

All eyes will be focused on projections. Powell

With rate change (or lack thereof) a given certainty, FOMC members’ quarterly economic estimates, particularly for the path of the fed funds rate, are expected to get more attention.

When Fed officials last published similar estimates in March, the median forecast was for three quarter-point rate decreases in 2024. However, with 2024 half gone and inflation continuing more resistant than expected, the chance of three rate cuts is fading, leaving only one or two more plausible.

“We see the Fed revising its outlook in favor of slower growth and firmer inflation,” said Michael Gapen, a U.S. economist at Bank of America Securities. “It should project two rate cuts this year and a cutting cycle that begins in September.”

Those forecasts may be impacted by the May Consumer Price Index data, which is scheduled to be issued Wednesday morning, hours before the Fed’s pronouncements in the afternoon. According to Chris Clarke, associate professor of economics at Washington State University, higher-than-expected inflation might even rekindle talk of rate rises.

“If it comes out strong, we’re going to see them change their tune about what they believe will happen at the end of the year,” he stated. “But if it comes out soft, they might say, Yeah, rate cuts are still on the table.”
As is customary, Fed Chair Jerome Powell’s comments at his post-announcement news conference might influence the interest rate forecast and market movements.

Given the hotter-than-expected inflation figures at the start of the year, recent conferences have focused on whether the Fed will hike interest rates anymore. Powell has already stated that this is unlikely, and Gapen expects him to reiterate that message.

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