Federal Reserve Chairman Jerome Powell speaks during the Centennial Conference of the Division of Research and Statistics of the Board of Governors of the Federal Reserve System on November 8, 2023 in Washington DC, USA. (Photo by Celal Gunes /Anadolu via Getty Images)
Celel Gunes | Anadolu | Getty Images
Wednesday is expected to be one of the most important days of the year for economic news as investors will learn about the direction of inflation and how the Federal Reserve plans to respond.
In a double whammy that begins in the morning with the crucial consumer price index for May and ends with the Fed’s monetary policy meeting in the afternoon, important signals are being sent about the direction of the economy and whether policymakers can soon take action off the brakes.
The day “packs months of macroeconomic risks into one day,” wrote UBS economist Jonathan Pingle.
Like many on Wall Street, Pingle expects the CPI report, along with last Friday’s surprisingly strong nonfarm payrolls numbers and other recent data releases, to prompt Fed officials to upgrade their outlook for inflation, economic growth and change interest rates.
Optimists hope that the moves will be largely in line with expected results and will not do much to rattle the frayed nerves of market participants.
“While both have typically proven to be market-moving events, we expect little fireworks from either release as we expect more positive results,” said Jack Janasiewicz, senior portfolio strategist at Natixis Investment Managers.
Broadly speaking, here are the expected outcomes of both events.
CPI inflation
The measure of how much a broad basket of goods and services cost consumers in May is expected to change little from the previous month – up just 0.1% from April, although that’s still an overall annual increase of 3.4% would correspond.
Excluding food and energy prices, the so-called core PCI is expected to show a monthly increase of 0.3% and an annual rate of 3.5%.
None of these numbers are dramatically different from April’s numbers and still show inflation well above the Fed’s 2 percent target. Still, some economists say a look under the hood of several key metrics such as insurance costs and core services excluding housing will show that inflation is at least trending in the right direction, albeit gradually.
“We can expect more of the same on the inflation front – further evidence that the broader disinflationary trend is still intact and that the tougher first quarter data was merely a pause in a downward trend,” Janasiewicz said.
An important point about the CPI: Although it attracts a lot of attention from both investors and the general public, it is not the primary metric the Fed uses. Central bankers prefer the Commerce Department’s Personal Consumption Expenditure Price Measurement, a more comprehensive measurement that also takes into account changes in consumer behavior.
The Bureau of Labor Statistics is scheduled to release the CPI report on Wednesday at 8:30 a.m. ET.
The Fed meeting
As the BLS distributes the CPI report, members of the Federal Open Market Committee, who set the interest rate, will finalize their forecasts for inflation, gross domestic product and unemployment and provide the expected path of interest rates through 2026 and beyond.
When it comes to interest rates, the Fed will primarily do… nothing. Both market pricing and policymakers’ rhetoric suggest that there is virtually no chance of interest rates moving in one direction or the other, with the central bank keeping its benchmark overnight interest rate in a range between 5.25% and 5% .50% left.
Instead, officials will take other measures that will keep markets closely watched.
FOMC members will release quarterly updates to their summary of economic forecasts that could be influenced by the CPI report. While meeting participants typically submit their estimates early on Wednesday, the 19 meeting participants are generally given a little more time to consider the incoming data.
The informal consensus in market commentary is that the Fed will adjust the path of its crucial dot plot upward. The impact would mean the grid likely points to fewer than the three rate cuts announced in March for 2024, toward a path that most economists expect to see two cuts, although there are some concerns the prospects could fall to just one.
If the Fed were to signal a rate cut, that would likely mean the Fed wouldn’t act until November or December, UBS’s Pingle said.
Economists at Goldman Sachs expect two interest rate cuts, the first to come in September. However, others disagree: Bank of America is calling for one and Citigroup is looking for a possible three, although it expects the dot plot to show two.
“Our conviction remains limited because we continue to view cuts as optional, the inflation news we expect would make a decision to cut reasonable but not obvious, and FOMC participants have differing views,” Goldman economist David Mericle wrote.
Economists also expect the Fed to cut its outlook for gross domestic product growth and raise expected inflation levels from March forecasts.
Other key developments from the Fed include Chairman Jerome Powell’s post-meeting statement and subsequent press conference.
“We do not expect any significant changes to the FOMC statement or Chairman Powell’s message at the June meeting. The most notable theme from Powell’s last press conference in May was his rejection of possible rate hikes, but talk of rate hikes has since died down in markets,” Mericle said.
In fact, few Fed officials have mentioned the possibility of another rate hike in their public comments.
However, the market had to drastically adjust its expectations from early 2024, when traders expected six rate cuts this year.
The latest economic data, likely to be picked up in Wednesday’s CPI report, points to an evolving economy where longer interest rate hikes are seen as a much greater possibility. Friday’s payroll report, for example, showed that wages rose 4.1% annually, well above what the Fed would like to see.
“A still-growing U.S. economy is keeping wage growth stubbornly above the Fed’s unofficial target of 3.3 percent,” wrote Nicholas Colas, co-founder of DataTrek Research. “Unless economic growth cools, it is hard to see a path to anything more than a symbolic Fed rate cut in 2024.”
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2024-06-11 21:33:19
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