The Federal Reserve’s monetary policy meeting this week comes at an uncertain time for the institution. Inflation spikes taking place in the United States have forced Fed members to reconsider their road map for the coming months and have erased expectations of aggressive rate cuts by the US central bank in the medium term. The Fed continues to plan to begin the process of cutting rates and has been warning for several months of a possible inflationary rebound within months, but at its last meeting in early May, some members began to show doubts. regarding the rate reduction guys. In this environment of high uncertainty, there are some clues that investors should keep an eye on to decipher the organization’s positioning: updating the macro forecast table, the organization’s scatter plot and the official speech are the most important elements at this time.
Inflation hasn’t fully convinced the Federal Reserve that it’s time to cut rates, but it’s not high enough for the institution to consider radically changing its stance and consider changing its plan to lower the cost of money. In this context, this Wednesday’s Fed meeting took on particular significance as the institution is set to update its macro forecast table and scatter plot, two of the Fed’s most important tools and the ones most watched by investors. anticipate future movements of the organization.
Enguerrand Arthas, manager of the La Financière de l’Echiquier fund, confirms the uncertainty of the environment in which the Federal Reserve is forced to act: “Market participants’ forecasts for the Fed’s path have rarely been so disparate: “Some continue to forecast the first contraction in June and several more in the coming months, while others even go so far as to not expect any contraction in 2024,” he notes.
The market is currently pricing in the Fed to cut rates just once before 2025, and that will be at its September meeting, although expectations are almost built into a second rate cut at the last meeting of the year, in December. Analysts, for their part, expect two rate cuts this year followed by four more next year, according to a Bloomberg survey last week. However, this roadmap will depend on macroeconomic data published in the United States and the inflation forecasts of Fed members.
The key for some analysts now is how the Fed interprets the latest inflation data., which happened in April last year, which gave members some respite as it broke the trend of unexpectedly higher inflation. Eric Weissman, chief economist and portfolio manager at MFS Investment Management, explains that “perhaps most important will be whether the Fed believes April consumer inflation readings were low enough to mark the start of a weakening path. several months of much more controlled inflation before he starts cutting interest rates. It is unclear whether the April data on the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) meet these criteria. This may become clearer during the press conference. “Weisman explains.
Following this reasoning, At this meeting, the official message of the organization takes on special significance., as well as a speech by Jerome Powell, the president of the Federal Reserve, and a press conference after the announcement of his new measures. According to Powell, clues can be found that will explain where the organization is heading, when the process of cutting rates will begin (if it begins), and whether the Fed has an aggressive move in mind, or rather an initial rate cut that the organization will pause from to analyze how its decision will affect the economy.
The Fed’s road map is reflected in a scatter plot
The Federal Reserve publishes a chart every three months that attempts to indicate to the market which direction interest rates are moving: a scatter plot or a dot plot. This is not a commitment, but rather a guide for investors, which may change radically if macroeconomic conditions require it. The chart shows where each member of the Federal Open Market Committee thinks rates will be in the future, a statement of intent that helps indicate clearly where rates are expected to move.
Therefore, meetings where the scatter plot is updated are key to understanding changes in opinion that may occur within the Committee. At its March meeting, the last time the dot plot was updated, the Fed set its interest rate targets at 4.6% in 2024, 3.9% in 2025 and 3.1% in 2026. Now analysts surveyed by Bloomberg believe it will be revised. up, excluding smaller rate cuts. The dot plot would point to 4.9% by the end of this year, 4.1% by 2025 and 3.1% by 2026, according to analysts. One thing is clear: the market is expecting a cycle of rate cuts that will continue over the next few years.
Update of the table of macroeconomic forecasts
The macro chart update is another one of the most important elements to watch for in this week’s meeting. The Fed will review its forecasts for inflation, GDP and unemployment in the coming years, and this update could provide clues about what scenario and plan the agency might be managing for now. In March, when the central bank last revised those forecasts, it kept its inflation scenario at 2.4% this year, 2.2% in 2025 and 2% in 2026, keeping the institution in place.
Analysts expect the agency to revise its inflation forecast for this year slightly upward. to 2.5%, but the key in this case is not so much a specific figure as a trend: a significantly larger increase would reflect the Fed’s concerns about inflation and a less aggressive rate-cut scenario; On the contrary, if they keep their estimates unchanged, they will confirm that concerns about a rebound in inflation are not as serious as some may assume.
Likewise, a hypothetical revision to GDP estimates would also provide insight into the Fed’s plan: In March, the agency released forecasts of 2.1% for 2024, 2% for 2025 and 2026, and 1.8% for the long term, figures according to data. analysts surveyed will not see any changes in this week’s survey.