FOMC preview – rates to stay unchanged as inflation refuses to co-operate

[MongiIG]

This week’s Fed meeting will see rates stay unchanged, as the Fed’s quest to cut rates is thwarted by stubbornly high inflation.

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Inflation Federal Reserve Federal Open Market Committee Personal consumption expenditures price index Interest rate United States

Written by: Chris Beauchamp | Chief Market Analyst, London

 

Publication date: Monday 29 April 2024 11:46

Investors prepare for another pause on rates

Investors are anticipating that the Federal Open Market Committee (FOMC) will maintain its current federal funds interest rate target at its upcoming meeting that concludes on May 1. The Federal Reserve (Fed) has kept rates steady at 22-year highs since July 2023 as it fights to get inflation under control without sending the U.S. economy into a recession.

Inflation remains high

While the S&P 500 is up 4.73% year-to-date on optimism the Fed will achieve a "soft landing" for the economy, even notable FOMC members have been forced to admit inflation has been stickier than anticipated. The latest data shows core consumer price index (CPI), excluding volatile energy and food prices, was up 3.8% from a year ago in March.

US jobs outlook still strong

On a positive note, the latest employment numbers suggest the U.S. labour market remains resilient. The economy added 303,000 jobs in March, and the unemployment rate dropped to 3.8%, while the labour participation rate increased to 62.7%.

Rates to stay higher for longer

Several Fed officials, including Chair Jerome Powell, have signalled rates may need to stay higher for longer if inflation does not meaningfully slow. Powell acknowledged a "lack of further progress so far this year" in reaching the Fed's inflation target and said it's "likely to take longer than expected" to achieve their inflation goals.

Key upcoming economic reports before the May meeting include the preliminary first-quarter U.S. The gross domestic product (GDP) growth estimate on April 25 and the March Personal Consumption Expenditures (PCE) inflation reading on April 26. The University of Michigan's April consumer sentiment reading on April 26 will also provide an update on how higher interest rates are impacting American shoppers.

Cautiously-hawkish stance stays in place

Overall, the Fed is expected to maintain its cautiously-hawkish stance and high interest rates until it sees convincing evidence of sustained lower inflation towards its 2% target. Markets are now pricing in a 53.1% chance the FOMC will issue at least two 25 basis points rate cuts by the end of the year, but that percentage has fallen dramatically in the past month.

 

 

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