a weak majority favors a single cut
The Federal Reserve remains uncertain on rates. The central bank isn’t touching current levels (between 5.25% and 5.5%) but is lowering its expectations for the rest of the year: after the two cuts they had expected so far, Fed managers have bet on a cut without making a decision. the second one came out. An answer that will not get wet and cause uncertainty in the institution’s further actions.
According to the “dot plot” in which FOMC members present their interest rate forecasts for the rest of the year, managers wanted to play with ambiguity. Four participants are betting on no cuts, seven are betting on one cut, and another eight are betting on continuing to use both options. which was originally expected. A move toward a hawkish tone for a single rate cut this year, but it doesn’t provide a clear answer on what the central bank’s move would be if split into one or two cuts.
Essentially, the statement offers one piece of advice as the Fed acknowledges that there has been “modest progress” toward its 2% inflation target, something they haven’t said in previous months. In turn, the report claims that they need “more confidence” before taking the step to the first rate cut.
In fact, at the press conference following the release of the statement, Powell wanted to make it very clear that uncertainty is very high at the moment, so the decisions the Fed makes in the future “will be data driven.” This, according to Powell, causes the “scatter plot” to currently lose some weight as a forecast plot due to the highly variable existing environment. “Nobody at the Fed has a strong commitment to a particular interest rate trend right now. Nobody wants to send a very strong signal with their opinion, because we need to have more conviction and see what is happening with the labor market, with the balance of risks… etc. What we saw today with the inflation data is good familiar and strengthens our confidence, but not enough to start lowering rates,” the president explained.
In exchange for lower forecasts for this year’s rate cuts, expectations for next year have moved toward the doves, with cuts that were reversed this year carrying over into next year. And this is what Although the Fed once again softened its expectations for rate cuts this year, it did not do so in 2025., in a year in which they now plan to cut rates by 100 basis points, which is equivalent to four 25 basis point cuts over the course of the year. Fed members’ expectations were less aggressive in March, as they expected a rate cut of just 75 basis points. So, The cut they removed for 2024 has now been carried forward to next year.
As for the 2026 scenario, the Fed believes it will maintain the same rate of increases: 4 cuts of 25 basis points, leaving the price of money between 3% and 3.25% (average 3.125%) at closing sessions. year.
“Aggressive Review”
Michael Brown, a strategist at currency broker Pepperstone, said the Fed’s decision is an “aggressive overhaul” from the three rate cuts it expected last March. “This is a more aggressive review than expected and as markets were pricing in ahead of the meeting, which is not too surprising given the lack of progress seen so far in tackling inflation. ” explains Brown.
Capital Economics believes that “there is nothing that would rule out a rate cut in September. Everything will depend on the macro data that is published. If employment growth falls again and the May inflation data turns out to be the beginning of a disinflationary trend, as we expect, then the most likely scenario is two rate cuts,” the firm points out.
Good CPI data on Wednesday boosted market confidence from the first hour. The monthly rate fell to 0% and the annual rate fell to 3.3%, one-tenth lower than expected. AND The report’s “fine print” suggests that the decline is not specific, but rather that the slowdown has resumed.. The result was big gains for the S&P 500 and Nasdaq, which continued to set new records at the mercy of technology companies, while 10-year bonds fell more than 13 basis points simultaneously.
The announcement renewed enthusiasm for two rate cuts this year. According to CME’s Fedwatch app, which calculates the probabilities investors place on future Fed decisions: The market already gives a 99% chance that there will be two cuts this year., one in September, the other in December. A noticeable change since just two days ago there was a 50% chance of a second contraction.
In that sense, according to Ronald Temple, an analyst at Lazard, the CPI data is what the Federal Reserve needs to boost confidence that inflation is falling and that rate cuts are worthwhile in the coming months. In this context, possible decline in the price of money in September gains more whole numbers. So far, several Fed members, including Jerome Powell himself, have repeatedly indicated that they need more positive economic data in a few months to ensure they are truly on track to meet their 2% inflation target.
Those warnings intensified last week when May employment data was released, leaving some numbers somewhat confusing. The report found that nonfarm payrolls were created last month by 272,000, more than the previous month and higher than analysts had expected. On the other hand, unemployment rose by one tenth to 4%. Additionally, average hourly earnings increased more than expected, reaching an annual rate of 4%, a far cry from the 3.5% rate that the Fed interprets as reflecting a decline in inflation toward its 2% target.
At the stock market level this announcement had a hard time digesting the Dow Jones Industrial Average, with an industrial selective trading flat and flirting with red at 38,743 units, whereas previously it was timidly rising. For its part, before the Fed unveiled its road map for the coming months, the S&P 500 and Nasdaq 100 indexes were trading at record highs, up 1.08% and 1.44%, respectively, thanks to technology developments, especially from Apple. and Nvidia. Following the decision to keep interest rates on hold and leave planned cuts for this year up in the air, both remain at record levels, with the S&P 500 up 0.95% at 5,426 and the Nasdaq 100 up 1.30% at 19,454. .