The Federal Open Market Committee (FOMC) chose to maintain the federal funds rate at its meeting on May 1, marking the sixth consecutive meeting without a change.
This decision was influenced by earlier inflation data and robust job growth, which have so far prevented any policy easing.
In recent months, the economic landscape has shown signs of moderation. Core Personal Consumption Expenditures (PCE) inflation, a key measure watched by the Fed, slowed to an annualised rate of 3.5% in April.
This decrease indicates that inflationary pressures are easing, which is a positive development for the economy. At the same time, the job market has shown signs of rebalancing. Payroll growth in April was 175,000, down from an average of 269,000 in the first quarter of the year.
Additionally, both the ISM manufacturing and services indices recorded contractionary readings in April, reflecting slower economic activity across these sectors.
Despite these developments, the Fed remains cautious. Fed officials need more evidence of sustained progress in controlling inflation before they consider reducing the federal funds target range.
Market participants currently expect no rate changes at the upcoming June meeting, though there is potential for a rate cut in the fourth quarter of this year. The May employment report, scheduled for release on June 7, could be a decisive factor in future policy decisions.
In the forthcoming meeting, the FOMC is expected to update its Summary of Economic Projections (SEP). The March dot plot projected a median expectation of 75 basis points (bps) of easing by the end of 2024.
However, given the recent economic data, we anticipate that the median projection may shift to indicate 50 bps of easing by year-end, though it might only signal 25 bps of rate cuts in 2024.
Additionally, the median longer-run fed funds rate, which ticked up slightly to 2.56% in March, is likely to see a modest increase. We expect the new median value to fall between 2.625% and 2.75%, reflecting an updated view on the neutral policy rate.
The macroeconomic forecasts within the SEP are not expected to show major changes in real GDP growth projections.
However, the median unemployment rate forecast for year-end 2024 may rise by 0.1 to 0.2 percentage points, and the median projections of PCE and core PCE inflation rates for this year are likely to increase by about 0.2 percentage points each.
The post-meeting statement is anticipated to include updates to reflect lower run-off caps for Treasury securities and acknowledge recent data suggesting a reduced threat of price re-acceleration. Despite this, the statement will continue to describe inflation as “elevated,” underscoring ongoing concerns.
The June meeting and subsequent data releases, particularly the May employment report, will be imperative in shaping the Fed’s policy direction for the remainder of the year.
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