(Bloomberg) — Federal Reserve officials may not be ready to finalize closely watched projections for interest rates until the publication of a key report on consumer prices on the final day of their two-day policy meeting.
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Disappointing inflation data since the projections were last updated in March are almost certain to prompt a downgrade to the number of rate cuts envisioned for this year. But the May consumer price index reading, out Wednesday at 8:30 a.m. New York time, will probably help determine how many reductions get taken out of the central bank’s “dot plot” displaying the expected rate path.
“You are going to get inflation data during the meeting, and that is what is going to determine the dots,” said Diane Swonk, chief economist at KPMG LLP. “The ultimate determinant is going to be the inflation numbers.”
The policy-setting Federal Open Market Committee is widely expected to hold its benchmark rate steady for a seventh consecutive meeting as it awaits more evidence that inflation is still moving down toward its 2% target. The rate decision, and the projections, will be released at 2 p.m. in Washington. Fed Chair Jerome Powell will hold a press conference 30 minutes later.
Projections
FOMC participants are “encouraged to update” their projections when key data are released during the two-day policy meetings, Powell told reporters in December. Until “maybe late morning” on the final day of the meeting, “it’s OK to update,” and at the December meeting, “some people did update their forecast” to incorporate new inflation data, he said.
A 41% plurality of economists expect the median rate projection to signal two cuts in 2024, while 41% expect it to show just one or no cuts at all, according to a Bloomberg survey. Some officials could also mark higher their expectation for appropriate rate levels in the longer term, reflecting the view that restrictive policy has seemed less effective in slowing the economy lately than in past cycles.
“They do see some upside risks,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “That means easing very carefully, making sure that they’re not over-easing and inadvertently boosting the economy.”
Policymakers will probably boost their 2024 inflation estimates, reflecting higher-than-expected readings in the first quarter. They could also raise their projections for the unemployment rate after a monthly report published Friday showed it climbed to 4% in May, the highest level in more than two years.
What Bloomberg Economics Says…
“The June FOMC meeting will be one of the most pivotal this year as Powell may provide the clearest hint yet as to the rate-cut timetable. The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version.”
— Anna Wong, chief US economist
Statement
The FOMC is almost certain to retain the guidance on rates in its post-meeting policy statement, which says no reductions will be appropriate until it has more confidence that inflation is moving sustainably toward its 2% target.
In May, the FOMC said “in recent months, there has been a lack of further progress” on inflation. Retaining that phrase could be read as hawkish after April inflation data, published since the May policy meeting, showed a moderation from the previous three months.
Committee Changes
St. Louis Fed President Alberto Musalem, who began his role in April, will submit quarterly projections at this week’s meeting for the first time. It will also be the final meeting for Cleveland Fed President Loretta Mester, who is stepping down at the end of June when her term expires.
Press Conference
Powell will probably be pressed by reporters on whether he agrees with the median rate projection for 2024, and about whether rate cuts at upcoming meetings in July or September would be under consideration. At the moment, investors are putting almost even odds on a September cut, according to futures, while the implied odds of a cut in July are minimal.
The Fed chair is also certain to be asked about the consumer price index, though officially the Fed targets a separate price gauge based on personal consumption expenditures, which will be updated at the end of the month. He will also probably be quizzed on recent signs of a moderating labor market and cooling economic growth.
“People might ask him about the softening momentum and how they think about it,” said Stephanie Roth, chief economist at Wolfe Research. “He is likely to say they are monitoring it, and so far the consumer seems to be OK — maybe some cracks from the low end — but this is something that they’re keeping a close eye on.”
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