Fed poised to keep rates unchanged despite expected rhetoric change

Markets expect the Fed rate to remain unchanged at the end of the Federal Open Market Committee meeting today, Wednesday, May 1, as inflation data for early 2024 has raised concerns that the transition to a 2.00% annual inflation rate may take longer than previously expected.

Markets are awaiting the Fed’s decision for any clues or indications as to when the Fed may begin cutting interest rates. Currently, fixed income trading markets are betting that a rate cut could begin at one of the FOMC meetings next July or September.

No interest rate cut is likely for FOMC meeting next June either. This means that the first rate cut may be decided at least one year after the last rate hike by the Fed, last July.

The most pressing question in the markets today is: What might happen in the Fed’s rhetoric in May? It is widely expected that the Fed will keep current interest rates unchanged at its meeting that began on April 30 and ends later today, Wednesday, May 1. These expectations are based on what policy setters have said and what they have stated on more than one occasion that they still need more evidence that inflation is on its way to the central bank’s 2.00% target on a firm plan.

The decision to stabilize the interest rate expected on May 1, which may be a result of latest economic data. Fed may be stuck between the decline in economic growth, which was reflected in the gross domestic product indicators last week, on the one hand, and the rise in inflation according to the latest readings of personal consumption expenditures, on the other.

The US GDP index fell to levels below market expectations in 2024’s Q1, which was also lower than the reading for the same period last year, indicating a deterioration in the actual reading. The index recorded a decline to 1.6% compared to last year’s Q1 at 3.4% and lower than expectations that indicated a less severe decline to 2.5%, according to data issued Thursday.

The reading of the PCE Index, which is one of a series of indicators bearing that name and which the Fed considers the most reliable and reliable in measuring inflation in the United States, rose by 3.4% in the first quarter of 2024, compared to the previous reading, which recorded 1.8%.

This means that US inflation is still rising, holding at levels far from the official target set by the Fed, which may discourage the central bank from cutting rates any time soon.

Rate cuts may not be decided this year:

One of the most prominent statements that came out of the Fed’s officials was a statement by Rafael Bostic, head of the Fed in Atlanta, during which he ruled out interest rate cuts by Fed before the end of this year.

In light of the US GDP decline to 1.6% in Q1, 2024, as well as the personal consumption expenditures index rising for the third month in a row to levels that exceed market expectations as well, we may see a change in the Fed’s rhetoric towards keeping current rates unchanged for some time.

This possibility sheds light on an important change in the price movement in global financial markets, as maintaining the interest rate and not starting to lower it, which means that the US dollar will continue to be among the high-yielding assets, which indicates the possibility of the currency achieving significant gains in the near future.

Fed’s Rhetoric

Not everything surrounding the FOMC meeting will be predictable. Therefore, markets may see somewhat different language used by the Fed in formulating the interest rate statement issued following the announcement of monetary policy decisions.

Since the onset of 2024, the Fed has continued to include in its speech to the markets paragraphs that indicate a state of satisfaction with the current economic conditions and indicate that interest rates may have reached their highest levels and that inflation has declined to an area close to the central bank’s target, which means with no doubt, the US central bank believes that it is likely to start reducing interest rates.

In addition, the official interest rate forecasts – issued based on the result of the vote of FOMC members concerning the future path of the rate during December meeting – indicated the possibility of the Fed cutting rates three times in 2024.

However, we may see a change in this rhetoric in which the Fed talks about the interest rate path in the coming period, especially following the inflation data that highlighted rise in personal consumption expenditures indicators in the United States for the third month in a row.

Therefore, we believe that the decline in US GDP growth and the continued rise in inflation rates at a faster pace than expectations, would lead to a delay in starting to reduce interest rates in order to combat inflation.

Fed’s Policy, Future Path

The latest Fed rate forecasts show that most Fed policymakers see the possibility of a rate cut by the Fed by three-quarters of a percentage point in 2025 – or at least three times through the end of 2024 – less than the one percentage point expected last December.