Investors prepare for Fed to reverse 2024 rate cut forecast

Investors are nervous this week as Federal Reserve officials prepare to signal how many more interest rate cuts are likely in 2024.

Most market observers believe that policymakers will lower their expectations. The question is how much.

Wednesday’s new projection will come in the form of a “dot plot,” a quarterly updated chart that shows each Fed official’s predictions about the direction of the federal funds rate.

In March, the dot chart revealed consensus among Fed officials in favor of three cuts. That projection is now in question following a string of tough inflation numbers, cautious comments from Fed officials and a U.S. labor market that added more jobs than expected in May.

Most investors now expect little more than a single cut for 2024.

“I think the policy trajectory is going to change a little bit,” said former Kansas City Fed President Esther George, who predicts the median among 19 policymakers could fall to a decline, even though a good number of officials always plead for two.

“I expect the points to show and confirm what I think the market has been picking up on, which is fewer rate cuts with inflation expectations remaining.”

Federal Reserve Chairman Jerome Powell. REUTERS/Amanda Andrade-Rhoades (Reuters/Reuters)

Fed Chairman Jay Powell and his colleagues on the Federal Open Market Committee stressed that they want to ensure inflation falls “sustainably” to their 2% target before beginning cuts , and in the meantime, they expect to keep rates higher for longer. .

This position is not expected to change this week. Officials are widely expected to hold the Fed’s benchmark rate steady on Wednesday, leaving it at its highest level in 23 years.

Policymakers should remain cautious as the latest inflation and economic figures paint a mixed picture.

The labor market created 272,000 nonfarm payroll jobs in May, significantly more than the 180,000 expected by economists, but the unemployment rate rose from 3.9% to 4%.

Prices aren’t accelerating as much as in the first quarter, but recent numbers also don’t show enough progress for the Fed to start cutting rates.

The year-over-year increase in the Fed’s preferred inflation gauge — the “core” index of personal consumption expenditures — was 2.8% in April, unchanged from March .

A further complication is that wages are also showing resilience. Wage growth was stronger than expected in May, coming in at 4.1%.

Fed officials will get a new reading of another inflation gauge, the Consumer Price Index (CPI), just hours before wrapping up their policy meeting on Wednesday. It is expected to continue to moderate in May after an encouraging month of April.

The year-over-year change in the so-called “core” CPI — which excludes volatile food and energy prices that the Fed cannot control — is expected to decline slightly by a tenth of a percent at 3.5%, compared to 3.6% in April. and 3.8% in March.

A CPI figure of 3.5% may not be enough to inspire confidence…

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