FOMC Decision Preview: Interest Rate Cut Still Uncertain

Amid uncertainty surrounding interest rate cut forecast for the remainder of this year, the Fed meets for two days to discuss monetary policy. When this meeting ends on Wednesday, June 12, traders, analysts, and investors look forward to the decisions made there in hope of learning additional signals on the central bank’s strategies to contain inflation and push the US economic growth forward.

In order to prevent inflation from rising over desired levels, the Fed plans to hold interest rates higher for a longer. Later this year, policymakers may decide a rate cut. Amid uncertainties, growth is likely to be slower, prices could rise, and there will be more swings. Market conditions and expectations for the future will be influenced by how Fed addresses these issues and how businesses and consumers engage with the economy. Interest rates at their current level could maintain the currently higher borrowing cost which would be bad for both consumers and businesses.

Fed’s expected decision:

The Fed is widely expected to keep current interest rates unchanged in the 5.25 to 5.50% range at its June meeting, but expectations for a rate cut later this year remain uncertain.

Economic Forecast:

The Fed is likely to unveil updated economic forecasts that differ from those issued three months ago. The new forecasts point to lower interest rates than markets expected and of course less than investors had hoped for early this year, with inflation expected to rise faster and relatively slower pace of growth.

Concerns about inflation and growth:

Fears of persistently high inflation and sluggish economic growth are worsened by the lack of clarity on interest rate cuts. While some recent data show symptoms of slowing growth, raising fears about the prospect of a recession in the US economy, policymakers are nonetheless concerned about the high levels of inflation that persist. It is important to read three of the most recent indicators that were announced in this context:

Firstly; The monthly labour turnover index (JOLTS report) issued on June 4 by the Bureau of Labour Statistics, providing data on job opportunities, hirings, resignations, and layoffs in the US, which was followed by a downward trend for American stocks, and its reading indicated a further slowdown. It fell to much less than the estimates of 8.3 million, and the indicated reading came at 8.06 million, meaning that it supports a slowdown in the economy, and hence the need to reduce interest rates.

Secondly; Fed’s preferred inflation index; the PCE Index which recorded a growth of 0.3% on a monthly basis in April, similar to March, and during the 12 months until April, the consumer price index “PCE” recorded 2.7% on a monthly basis. On an annual basis during last April, these readings were in line with consensus.

Thirdly; NFP data rose to 27,200 jobs last May, compared to the previous reading, which recorded 165,000 jobs, exceeding market expectations at only 185,000 jobs.

Alternative economic scenarios:

In light of these concerns, it is expected that Fed Chairman Jerome Powell will focus his press conference after the monetary policy decision on discussing alternative economic scenarios rather than focusing on rate cut expectations, and analysts are awaiting the language that Powell will adopt, as well as any warnings that his speech may contain afterwards. Markets are also awaiting the reading of one of the key inflation indicators, the Consumer Price Index (CPI), on Wednesday.

Adjustments to interest rate cut expectations:

The majority of analysts expect the Fed to adjust its rate cut expectations this year, as it is likely that they will at most two or only one rate cut, instead of three as previously expected. At the meeting last March, policymakers expected to cut interest rates three times. Several times during 2024, given the fear that inflation rates will continue to rise, analysts expect that the March forecast will be revised to include two or only one interest rate cut this year.

The role of employment and wages data:

Employment and wages data play a pivotal role in the Fed’s decisions, as the bank closely monitors labour market indicators to ensure that the unemployment rate does not rise too high.

Contradictory indicators:

Contradictory indicators about the US economy make it difficult to accurately determine expectations for interest rate cuts. While some data shows continued strength in the labour market, other data points to signs of a potential slowdown.

Monetary policy makers vote

Investors focus on interpretations of the Fed’s “Dot Plot,” which includes a summary of FOMC votes and reflects policymakers’ expectations about the future path of interest rates. However, it is important to keep cautious against over-reliance on the dot plot. It does not represent a final decision, but rather reflects the extent of divergence of views among policy makers.

Challenges, Concerns:

Persistent Inflation: Inflation remains at high levels, posing a major challenge to the US economy. Inflation threatens households’ purchasing power and reduces business profits, which can slow economic growth.

Fears of a recession: Some indicators point to the possibility of a recession in the US economy, worrying investors and policymakers.

Geopolitical tensions: Geopolitical tensions, such as the war in Ukraine, are casting a shadow over the global economy, creating additional risks and challenges.

Supply chain bottlenecks: Supply chain bottlenecks persist, impacting production and trade and contributing to higher prices.

Decreased confidence: Uncertainty reduces consumer and business confidence, which can reduce investment and spending.

Declining investments: Uncertainty may reduce investments in new projects and hamper business expansion.