On Wednesday, the Federal Reserve is expected to maintain current interest rates. This is because the policymakers’ latest economic forecasts are likely to indicate fewer rate reduction this year than initially thought.

As the Fed’s two days of deliberations came to an end, the Bureau of Labour Statistics delivered some much-needed news on inflation: the consumer price index was flat month over month in May, and the annual pace of price increases decreased to 3.3% from 3.4% in the previous month.

With food and energy expenses excluded, the core index decreased from 3.6% in April to 3.4% in May.

Up until April of this year, the Fed’s attempts to bring inflation down to its 2% objective had only somewhat improved, and decision-makers had been hesitant to place significant emphasis on specific data indicators.

Analysts anticipate that the central bank will stick to its “no-rush” approach to rate reduction on Wednesday, keeping the benchmark policy rate in the 5.25%–5.50% range that was established in July, as robust job growth allays fears of a contracting economy.

However, investors locked in expectations for a quarter-percentage-point rate decrease in September and another one in December as a result of the low inflation reading for May.

Many observers believe that the Fed’s “dot plot” prediction for its benchmark policy rate will show just two quarter-percentage-point rate reduction by the end of this year, instead of the three that were projected as of March, if only to account for the passage of time, given the slower progress on inflation this year.

Nonetheless, in a group of policymakers that is almost evenly divided, the median might easily shift to only one cut. Powell used his press conference to “manage expectations” at a time when Fed policymakers feel particularly uncertain about the path the economy may take. “If there is any risk… it’s that there will be only one 25-basis-point rate cut this year,” stated Joe Brusuelas, chief economist for RSM US.

Powell and other decision-makers have reduced the likelihood of more rate hikes. In 2022 and 2023, the Fed hiked rates significantly in response to a 40-year peak in inflation.

The Fed’s favoured inflation gauge, the personal consumption expenditures price index, dropped from 7.1% peak annual rate in June 2022 to 2.7% as of April. It is believed that the present policy rate is sufficiently stringent to deter spending and investment while progressively bringing inflation back to the Fed’s objective.

But until they show further advancement, authorities are hesitant to make any changes. In addition to acknowledging the possibility of rapid increases in unemployment and the need for rate reduction to bolster the economy, they also identify components of inflation that may have stagnated at an excessively high level, notably in housing and the broader services sector.

That apprehension could be eased by the most recent CPI report.

“Although they did exhibit a welcome slowdown last month, price pressures are still high,” stated High Frequency Economics’ chief U.S. economist, Rubeela Farooqi.

However, she stated that “policymakers need to see more than one data point on inflation that shows a sustainable path towards 2% before cutting rates this year.”

(Adapted from EconomicTimes.com)

Categories: Economy & Finance, Geopolitics, Strategy