- Fed Watch figures indicate that there is a 91% likelihood of the Fed leaving rates unchanged at the upcoming FOMC meeting in May.
- Polymarket traders are also wagering that the Fed won’t cut interest rates during the May meeting.
- US President Donald Trump called for Fed Chair Jerome Powell to lower interest rates several times.
Why The Upcoming FOMC Meeting Matters?
This FOMC Meeting comes at a pivotal moment. Having held high interest rates for almost two years, the Federal Reserve now has increasing pressure to relax monetary policy. Although inflation has moderated from its 2022 peaks, it still tops the Fed’s 2% target. Meanwhile, housing, manufacturing, and consumer lending segments have started to feel the pressure of high borrowing costs.
Powell may have repeated again and again that the Fed is “data dependent,” but the data, if mixed, is now starting to indicate that. Can the May 7 FOMC Meeting mark the turning point?
Inflation vs. Economic Softness
Recent inflation readings have proved to be stickier than anticipated, with March’s CPI report reporting a modest increase in core inflation that has fueled discussions on potential justification for a Fed rate cut. Yet the larger economic landscape blunts that conversation.
RetaEarly in 2024, markets were pricing in as many as three rate cuts by the end of the year. But as hotter inflation readings rolled in, those hopes were brought back in. Today, most analysts think the Fed will keep rates unchanged at the next FOMC Meeting, but leave the door open for cuts later this year.
That being said, the bond market has already started to price in the likelihood of a cut as soon as June or July. A lot will hinge on Jerome Powell’s tone at the post-FOMC Meeting press conference.il purchases have decreased, delinquencies on credit cards are increasing, and consumer confidence is eroding. This deceleration is what makes the May FOMC Meeting so critical: the Fed has to slow inflation without slowing down economic growth.
Market Expectations Prior to the FOMC Meeting
Early in 2024, markets were pricing in as many as three rate cuts by the end of the year. But as hotter inflation readings rolled in, those hopes were brought back in. Today, most analysts think the Fed will keep rates unchanged at the next FOMC Meeting, but leave the door open for cuts later this year.
That being said, the bond market has already started to price in the likelihood of a cut as soon as June or July. A lot will hinge on Jerome Powell’s tone at the post-FOMC Meeting press conference.
What to Expect On The Event?
Investors and economists will have laser like attention to a handful of things,
Fed Statement Language, Any deviation from the way the Fed explains inflation and economic dangers will be dissected.
Dot Plot Revisions, These might show whether policymakers still expect cuts in rates during 2024.
Powell’s Comments, His tone, clarity, and forward guidance in the FOMC Meeting press briefing can weigh significantly on markets.
Even without a rate cut, a dovish bias in Powell’s comments may set off a rally in equities and bonds.
Hold Now, Cut Later?
The general perception in advance of the May 7 FOMC Meeting is that the Fed will not deviate from its existing stance. Increased economic weakness, however, may coax the central bank into a more accommodative direction over the next several months.
Whether or not a rate cut occurs in May or later this summer, one thing is sure: the FOMC Meeting will be a watershed moment. Markets will be hanging on every utterance, graph, and signal that comes out of it. For Jerome Powell and the Fed, the road ahead is tight and the stakes could not be higher.
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