The Federal Reserve is unlikely to implement any modifications to its monetary policy; however, the Federal Open Market Committee's meeting on Wednesday may provide insight into the potential timing of potential interest rate reductions by the central bank.
After the Fed's policy-setting committee concludes its two-day meeting on Wednesday, it is widely anticipated that the influential fed funds rate will remain at its current range of 5.25-5.50%. This is a 23-year high and has remained at that level since last July in an effort to maintain downward pressure on inflation.
It Is Unlikely That The Rates Will Fluctuate
The financial markets would be in for a significant shock if the Fed were to either increase the rate to further constrain inflation or decrease it to stimulate the economy. Traders are primarily pricing in a September rate cut at the earliest, according to the CME Group’s Fedwatch Tool, which forecasts rate movements based on fed funds futures trading data.1
Traders did scale back their wagers for a September cut to 50.8% on Friday from 68.7% the day before following a Bureau of Labor Statistics report that showed the job market running higher than expected in May, suggesting that wages and job growth may be placing upward pressure on inflation.
Movement in the influential interest rate either way would also contradict the recent public statements of central bank officials, who have signaled they’re prepared to hold the fed funds rate higher for longer.
Fed policy committee members have said they’re waiting for confidence that inflation is firmly on a path down to an annual rate of 2% before they’ll contemplate lowering their primary interest rate, which influences financing costs on all kinds of loans.
Recent reports showing inflation steadily decreasing may have alleviated concerns that price increases are accelerating. However, it is unlikely to have convinced policymakers that inflation is vanquished, leaving the Fed in a holding pattern.
All Eyes Will Be On Projections, Powell
With the rate movement (or lack thereof) a foregone conclusion, the FOMC members’ quarterly economic projections, particularly for the path of the fed funds rate, are likely to garner more interest.
The last time Fed officials made those projections, in March, the median outlook was for three quarter-point rate declines in 2024. But with 2024 half over and inflation remaining more obstinate than anticipated, the prospect for three rate cuts is diminishing, making just one or two more likely.
“We see the Fed revising its outlook in favor of slower growth and firmer inflation,” Michael Gapen, U.S. economist at Bank of America Securities wrote in a commentary. “It should project two rate cuts this year and a cutting cycle that begins in September.”
Those projections could be influenced by the report on the Consumer Price Index for May, which is set to be published Wednesday morning, hours ahead of the afternoon Fed announcements. Higher-than-expected inflation could even revive talk of potential rate increases, Chris Clarke, assistant professor of economics at Washington State University, told Investopedia.
"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 said. "But if it comes out soft, they might say, Yeah, rate cuts are still on the table."
As usual, the comments of Fed Chair Jerome Powell at his post-announcement press conference could inform the interest rate outlook and move markets.
A popular topic at recent conferences has been whether the Fed would raise interest rates even more, given the hotter-than-expected inflation data at the commencement of the year. In the past, Powell has said that’s unlikely, a message that Gapen expects him to repeat.
UPDATE: This article was updated after publication to include discussion of the impact of the government's May employment report on the prognosis for the Federal Reserve's interest rate decisions, as well as a remark from a professor of economics.
Important Lessons
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It is widely anticipated that the Federal Reserve will maintain its benchmark interest rate at its present level of 5.25-5.5% when it makes its policy announcement on Wednesday.
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The Federal Reserve is maintaining high interest rates in order to suppress inflation, despite the fact that this is causing the economy to chill. Officials are resolute in their effort to maintain these rates until they are satisfied that inflation has been tamed.
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Wednesday's announcement will provide additional insight into the Fed officials' perspective on the potential for rate cuts later in the year, as there is minimal likelihood of rate movement in either direction.