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


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

Wall StreetSource: Getty Images
 

Written by: Chris Beauchamp | Chief Market Analyst, London
 
Publication date: 

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.

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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