Article rewritten and expanded from original content by Gertrude Chavez-Dreyfuss, accessible via MarketScreener.
Title: Fed Officials Reinforce Hold on Rate Cuts, Shape Market Expectations into 2024
Author: Based on original reporting by Gertrude Chavez-Dreyfuss
The outcome of this week’s Federal Reserve policy meeting is widely expected to deliver a rate hold, but the remarks of several hawkish Fed officials in the lead-up to the decision, along with evolving inflation data, are influencing investor expectations on the future path of interest rates. Not only are policymakers resisting market hopes for a quick pivot to monetary easing, but some are even maintaining the possibility of additional hikes if inflation proves unexpectedly persistent.
Here are the key developments contributing to the broader narrative of Fed policy as officials signal a preference toward a prolonged elevated rate environment.
Fed Signals No Change at June Meeting
The Federal Open Market Committee (FOMC) is expected to leave its benchmark federal funds rate unchanged at its current range of 5.25 percent to 5.50 percent during its June policy meeting. Market consensus is heavily tilted toward no movement, marking the seventh consecutive meeting with rates on hold since the rate increase in July 2023.
Despite a growing number of investors and analysts anticipating a cut in the second half of 2024, recent statements from Fed officials indicate continued concern over inflation progress, and many are cautioning against premature loosening of monetary policy.
Hawkish Pressure from Federal Reserve Officials
In the final days before the policy meeting, several senior Fed officials publicly voiced the need for caution in considering rate reductions. These comments reverberated through financial markets and contributed to a reevaluation of the near-term policy direction.
Key points made by Fed officials include:
– Minneapolis Fed President Neel Kashkari stated that one interest rate cut in December could be a “reasonable prediction,” but stressed the outlook is highly data-dependent and that the Fed could alternatively stand pat for the rest of the year if inflation remains sticky.
– Boston Fed President Susan Collins echoed a similar tone, emphasizing that progress on bringing inflation down appears to have stalled in early 2024. She suggested that the central bank needs to maintain a restrictive stance for longer than previously anticipated.
– Philadelphia Fed President Patrick Harker also expressed skepticism about cutting rates too soon. He noted that the economic backdrop remains relatively robust, with solid job growth and continued consumer spending, which calls for patience in easing policies.
All three officials are non-voting members of the Federal Open Market Committee in 2024 but are widely viewed as influential voices in the formulation of federal monetary policy.
Inflation Cooling but Still a Concern
Recent economic data points to gradual disinflation, but the pace of improvement has been uneven. Inflation remains well above the Fed’s long-term target of 2 percent, and officials remain wary of declaring victory too early.
– The latest reading from the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred gauge of inflation, showed headline inflation running at 2.7 percent year-over-year in April, slightly below March’s 2.8 percent.
– Core PCE, which strips out volatile food and energy components, came in at a 2.8 percent annual increase, unchanged from March, suggesting minimal progress on this key measure.
– Meanwhile, the Consumer Price Index (CPI) for April increased by 0.3 percent month-over-month, with the annual rate holding at 3.4 percent, which remained stubbornly elevated and reinforced the Fed’s caution.
Taken together, the mixed inflation signals lead Fed officials to argue that more consistent evidence of a downward trend is needed before cuts can be justified. The data does not yet support a pivot away from the current restrictive stance.
Markets Dial Back September Cut Expectations
Prior to the latest round of hawkish Fed rhetoric, futures markets had been almost fully pricing in a rate cut at the Fed’s September meeting. However, expectations have shifted
Read more on EUR/USD trading.