Against the backdrop of weak economic growth and persistent inflationary pressures in the United States, the market generally expects the Federal Reserve (Fed) to maintain its current interest rate policy at this week’s rate decision. Meanwhile, internal discussions within the Fed seem to be shifting from how many interest rate cuts to make this year to whether rate cuts should be made at all.
The US Department of Commerce released its latest data on the 25th, which showed that the annualized growth rate of US GDP in the first quarter of this year was only 1.6%, while the core personal consumption expenditure price index (PCE), for the same period, increased by 3.7%, marking the largest increase in a year and exceeding market expectations. This data indicates unexpected weakness in economic growth and persistent inflationary pressures.
Against this backdrop, the market generally expects the Federal Reserve (Fed) to maintain its current policy unchanged at the May rate decision on Thursday. According to the CME Group’s FedWatch Tool, the probability of maintaining the current interest rate policy in May is as high as 95.9%.
With inflation data for the first three months of the US exceeding expectations, Fed Chairman Powell stated at an economic forum earlier this month that it may take longer than expected to have confidence in inflation returning to the central bank’s 2% target.
Fed officials also emphasized the need to maintain high interest rates as needed and hinted at delaying interest rate cuts. At the same time, the possibility of no interest rate cuts this year is increasing. Dean Maki, Chief Economist at Point72, pointed out that if inflation data does not significantly improve, the Fed will maintain its current policy indefinitely.
Minneapolis Fed President Neel Kashkari and other Fed officials, such as New York Fed President John Williams and Atlanta Fed President Raphael Bostic, have recently stated that they are not eager to cut interest rates and even support further rate hikes if necessary.
In the case of the market generally expecting interest rates to remain unchanged, all investors’ attention will turn to Chairman Powell’s post-meeting press conference. The market expects Powell to adopt a hawkish stance, contrary to the dovish stance taken in the past six months, and release hawkish rhetoric.
Marc Giannoni, Chief Economist at Barclays Bank, stated that this year’s resurgence in inflation may make Powell’s position more hawkish, and Diane Swonk, Chief Economist at KPMG, agrees, believing that Powell may use hawkish rhetoric to ease market expectations for accommodative policies.
In addition, Carl Tannenbaum, Chief Economist at Northern Trust Bank, believes that Fed officials’ confidence in inflation returning to the 2% target has “returned to square one” due to recent data. The question to be focused on next is how many months of benign data officials need to regain confidence in declining inflation.
Dean Maki, economist at Point72, believes that at least three months of good inflation data are needed to discuss interest rate cuts, therefore, this discussion may be postponed until September or later. Giannoni of Barclays also pointed out that analysts at the bank believe September is the earliest opportunity for an interest rate cut, but they do not rule out the possibility of the first rate cut taking place in December, and they expect only one rate cut this year.
These discussions highlight three key questions to closely monitor in this week’s and future rate decisions: whether the Federal Reserve is failing in its strategy to combat inflation, whether there is a possibility of rate hikes, and when the earliest rate cut may take place.
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