Federal Reserve Chairman Powell delivered a speech at the Centennial Celebration Meeting of the Research and Statistics Division of the Board of Governors of the Federal Reserve System in Washington, DC, the United States on November 8, 2023. society)
Seral Gunes | Anadolu | Getty Images
Wednesday will be one of the most important days of the year for economic news as investors learn where inflation is headed and how the Federal Reserve plans to respond.
Starting with the key consumer price index reading for May in the morning and ending with the Fed’s policy meeting in the afternoon, the one-two punch will send important signals about the direction of the economy and whether policymakers can act soon to release the brakes.
UBS economist Jonathan Pingle wrote that the day “compressed months of macro risks into one day.”
Like many others on Wall Street, Pingel expects the CPI report, coupled with Friday’s unexpectedly strong nonfarm payrolls data and other recent releases, will cause Fed officials to adjust their forecasts for inflation, the economy Growth and interest rate prospects.
Optimists hope that these measures will be largely within the range of expected results and will not have much impact on the nervousness of market participants.
Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers, said: “While both events have generally proven to be market-moving events, we do not expect any sparks from these two releases given our expectations for fairly benign outcomes. .
In a nutshell, here’s what to expect from these two things.
consumer price index inflation
A measure of consumer spending on a basket of goods and services is expected to be little changed in May from the previous month – up just 0.1% from April, although that would still be equivalent to an annual growth rate of 3.4%.
Excluding food and energy prices, the so-called core PCI is expected to rise 0.3% monthly and 3.5% annually.
The numbers are not that different from April’s data and still show inflation well above the Fed’s 2% target. Still, some economists say a closer look at a variety of important indicators, such as insurance costs and core services excluding housing, would suggest inflation is at least moving in the right direction, albeit gradually.
“On the inflation front, expect more of the same – continued evidence that the broader deflationary trend remains intact, while the stickier first-quarter numbers are only part of a downward trend,” Janasiewicz said. pause. “
One important thing to note about the CPI: While it receives a lot of attention from investors and the public, it is not the primary indicator used by the Fed. The central banker prefers the Commerce Department’s measure of personal consumption expenditures prices, which is a broader measure that also takes into account changes in consumer behavior.
The U.S. Bureau of Labor Statistics is scheduled to release the CPI report at 8:30 a.m. ET on Wednesday.
Fed meeting
As the Bureau of Labor Statistics releases its CPI report, members of the rate-setting Federal Open Market Committee will finalize forecasts for inflation, gross domestic product and the unemployment rate, noting the expected path for interest rates in 2026 and beyond.
First and foremost, when it comes to interest rates, the Fed is going to do… nothing. Market pricing and comments from policymakers suggest there is little chance of any change in interest rates, with the central bank keeping its benchmark overnight borrowing rate in a range of 5.25%-5.50%.
Instead, officials will take other actions that markets will watch closely.
FOMC members will release a quarterly update on the summary of economic forecasts, which may be influenced by the CPI report. While conference participants typically submit their estimates early Wednesday, the 19 conference participants are typically allowed a little extra time to interpret the incoming data.
The informal consensus among market commentators is that the Fed will adjust its key “dot plot” path upwards. The impact will mean the grid is likely to point to fewer than three rate cuts in March 2024, with most economists expecting two cuts but some fear the outlook could be scaled back to one.
Pingle of UBS said that if the Fed signals a rate cut, it may mean that the Fed will not take action until November or December.
Goldman Sachs economists expect two rate cuts, with the first in September. Others disagreed, though, with Bank of America asking for a 1 and Citigroup hoping for a possible 3, although it expected the dot plot to show a 2.
Goldman Sachs economist David Mericle wrote: “Our conviction remains limited as we continue to view rate cuts as optional, we expect inflation news to warrant a reasonable but non-obvious decision to cut rates, and FOMC participants have a variety of views.
Economists also expect the Fed to lower its forecast for gross domestic product growth and raise its forecast for March inflation.
Other major developments at the Fed include a post-meeting statement and Chairman Jerome Powell then held a press conference.
“We do not expect any major 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 opposition to a possible rate hike, but markets have since Discussions about raising interest rates have gradually subsided.
In fact, only a few Fed officials have mentioned the possibility of further rate hikes in public comments.
However, the market had to sharply adjust its expectations for early 2024, when traders expected six rate cuts this year.
Recent economic data is likely to echo Wednesday’s consumer price index report, showing that the economy is evolving and that longer-term interest rates are seen as more likely. For example, Friday’s non-farm payrolls report showed wages growing at an annual rate of 4.1%, well above what the Fed wants to see.
“The still-growing U.S. economy keeps wage growth stubbornly above the Fed’s unofficial target of 3.3%,” wrote Nicholas Colas, co-founder of DataTrek Research. “Unless economic growth cools, nothing else. It’s hard to see a path beyond a symbolic rate cut by the Fed in 2024.”
About The Author
