The U.S. Federal Reserve is expected to hold rates steady at the conclusion of its next meeting on Wednesday, May 1. However, there may be hints regarding how the Fed expects to react to the uptick in inflation reported so far in 2024. Currently, fixed income markets still expect the Fed to cut later in the year.
Uptick In 2024 Inflation
2024 reported inflation data to March has been a concern for policymakers. Recently inflation has accelerated somewhat, that’s despite disinflation across most inflation metrics on a 12-month view, according to the Atlanta Fed’s tracker. For example, the 3-month average of sticky prices less food and energy have seen accelerating inflation since December. Sticky prices includes prices of goods and services that change less frequently, and is thought to be a reasonable estimate of longer-term inflation expectations.
As such, the path to the Fed’s 2% inflation goal is less certain. Even in the best case, could take longer than previously expected. For now, the expectation is that Fed will leave rates at high levels for longer in reaction to reaction to inflation data but that interest rates will still be cut in 2024.
The FOMC’s Statement
The Federal Open Market Committee’s March statement noted that “job gains have remained strong,” and that inflation “has eased over the past year but remains elevated.” In terms of risks it was stated that, “the risks to achieving its employment and inflation goals are moving into better balance.” Importantly, the policymakers stated that, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
It will be noteworthy if the Federal Open Market Committee changes any language in these key areas of the statement. Specifically policymakers have generally maintained that they expect interest rates are currently at peak levels and cuts will likely come in time. If the recent acceleration inflation causes the FOMC to move back from that stance and raise the option of further interest rate hikes, that may spook markets. However, the FOMC has also expressed some confidence that falling shelter costs could ultimately help move inflation lower.
Market Expectations
Currently the CME Group’s
CME Group
FedWatch Tool, sees an 18% chance that rates are held steady for the remainder of 2024, but no chance of interest rates increasing from their current level of 5.25% to 5.5%. The most likely outcome is expected to be one or two interest rate cuts in 2024.
Upcoming Data
Perhaps more important than the FOMC’s May statement will be upcoming inflation releases. April’s Consumer Price Index inflation data will be released on May 15 and then May’s figures on June 12. The May CPI release will coincide with the conclusion of the Fed’s June meeting.
If monthly inflation returns to a more moderate monthly increase of around 0.2% as we typically saw in the second half of last year, that may give FOMC officials confidence in cutting rates.
However, if monthly CPI inflation remains in the 0.3% to 0.4% range as reported in recent months, then the FOMC may have to reconsider 2024 interest rate cuts. Unfortunately, nowcasts from the Cleveland Fed, which use current prices to estimate what upcoming inflation will be, suggest that CPI inflation for April could remain elevated.
