By Howard Schneider
WASHINGTON (Reuters) – The Federal Reserve is expected to leave interest rates unchanged on Wednesday, with new economic projections from U.S. central bank policymakers likely to show fewer rate cuts this year and a delayed start to monetary policy easing.
Fed officials will receive a new round of inflation data that could inform their outlook just hours before they conclude their final two-day meeting and release a new policy statement and updated quarterly projections.
But with the Fed’s efforts to bring inflation back to its 2% target this year showing only modest improvement through April and strong job growth allaying concerns about a weakening economy, analysts expect the central bank to will maintain a ‘no-rush’ attitude towards interest rate cuts. leaving the policy rate within the 5.25%-5.50% range set last July.
“Given that inflation remains above target and activity remains robust, the Fed may exercise patience as it determines when it might next adjust its policy rate,” Bank of America economists wrote of a meeting that they said would have little change in the central bank’s policy statement. in the guidance Fed Chairman Jerome Powell offered during his post-meeting press conference.
The statement will be released at 2:00 PM EDT (6:00 PM GMT), with Powell speaking to reporters half an hour later.
Given the current stagnation in inflation, many analysts expect the Fed’s dot plot projection for policy rates to show just two quarter percentage point rate cuts by the end of this year, down from the three expected as of March . just to take into account the passage of time.
But the median could easily tip to just one cut among an almost evenly divided group of policymakers. “If there is any risk… it is that there will be only one rate cut of 25 basis points this year,” said Joe Brusuelas. chief economist of RSM US, with Powell using his press conference to “manage expectations” at a point when Fed policymakers feel particularly uncertain about the path the economy may take.
CPI DATA
Powell and other policymakers have minimized the risk of a further rate hike. The Fed raised rates aggressively in 2022 and 2023 after inflation rose to a 40-year high.
The personal consumption expenditures price index, the Fed’s preferred inflation measure, fell from a peak annual pace of 7.1% in June 2022 to 2.7% in April. The current policy rate is considered restrictive enough to discourage investment and spending and gradually bring inflation back to the Fed’s target.
Yet policymakers are unwilling to make cuts until they see more progress. Just as they recognize the risk that unemployment could rise rapidly and justify interest rate cuts to support the economy, they see aspects of inflation, especially in housing and the broader services sector, that may be stuck at too high levels.
Economists polled by Reuters expect the consumer price index to rise just 0.1% in May, which would be the weakest reading since October, with core prices excluding food and energy expected to rise 0.3%. The U.S. Department of Labor will release the CPI report at 8:30 a.m. EDT.
While year-on-year CPI figures are expected to show little or no change from April, the report’s details should be seen “as a step in the right direction” after inflation rose more than expected earlier in 2024, economists at BNP Paribas. .
In their final comments before the latest policy meeting, a number of central bank officials, including Fed Governor Christopher Waller, said they needed to see several more months of improving inflation numbers before deciding to cut rates. Statements that investors have interpreted as cutting rates This will be pushed back to the September 17-18 Fed meeting at the earliest.
Even that start date for policy relaxation is a virtual flop. There was less than a 51% chance of a US interest rate cut in September, according to CME Group’s FedWatch Tool on Tuesday.
(Reporting by Howard Schneider; Editing by Paul Simao)
