The U.S. Federal Reserve is expected to maintain interest rates at its upcoming meeting on May 1, but there may be indications about how the Fed plans to respond to the increase in inflation reported in 2024. The current expectation in the fixed income markets is that the Fed will cut interest rates later in the year.
Inflation data for 2024 up to March has shown an increase, despite disinflation in most inflation metrics over a 12-month period. The Atlanta Fed’s tracker indicated that the 3-month average of sticky prices, excluding food and energy, has been experiencing accelerating inflation since December. This raises questions about the Fed’s path to achieving their 2% inflation goal, as current annual inflation rates range from 3% to 5% depending on the metric used. The expectation is that the Fed will keep rates high for a longer duration in response to inflation data, but rate cuts are still anticipated later in the year.
The Federal Open Market Committee’s (FOMC) March statement noted strong job gains and elevated inflation that has eased but remains high. The risks to achieving the Fed’s employment and inflation goals were said to be moving into better balance. The FOMC stated that it will only consider reducing the target range for interest rates when there is greater confidence that inflation is moving sustainably towards 2%. Changes to this language in the upcoming statement may have an impact on market reactions, particularly if there is a suggestion of further rate hikes due to inflation acceleration.
Market expectations currently indicate an 18% chance of interest rates remaining steady for the rest of 2024, with no forecasted increase from the current level of 5.25% to 5.5%. The most likely scenario is one or two rate cuts in 2024. The upcoming inflation releases, including April’s Consumer Price Index data on May 15 and May’s CPI figures on June 12, will be crucial in determining the Fed’s future actions. If monthly inflation returns to a more moderate increase similar to the second half of last year, it may give FOMC officials confidence in cutting rates. However, if inflation remains elevated as in recent months, the FOMC may need to reconsider rate cuts for 2024.
Projections for inflation data from the Cleveland Fed suggest that CPI inflation for April could remain high. This adds to the uncertainty surrounding the Fed’s decision on interest rates. The upcoming FOMC meeting on May 1 will provide further insights into the Fed’s stance on inflation and interest rates, which will be closely watched by markets. With inflation on the rise and the Fed’s inflation goal seeming less certain, investors will be eagerly awaiting any hints on future monetary policy at the conclusion of the meeting.
