Here we go: today is the day global financial markets will figure out how Jerome Powell’s Fed it could move in 2024 on US fed funds rates.
For today specifically, nothing new is actually expected: the forecasts are for unchanged rates in the range between 5.25% and 5.5%, a record of the last 23 years.
Always today it’s the day when the markets themselves and even the Fed – a few hours before making the big announcement on rates -, they will understand whether the US disinflationary process is progressing or not.
Own the lack of progress in decreasing the inflation growth rate towards the 2% target set by the US Central Bank had led investors to significantly withdraw speculation on the arrival of several cuts in the cost of money in 2024.
Fed ready to cut rates, or not? Today is also Inflation Day
In recent weeks there had also been no shortage of warnings about the risk that, instead of lowering them, the Fed could have raised rates again, despite the reassurances coming from President Jerome Powell (however, these were denied by some members of the institution themselves).
Then, the positive turning point arrived with the publication of the Fed’s preferred parameter for monitoring the inflation trend, i.e. the PCE core index, recently made known, had raised the spirits of the doves and the markets:
those indications of the cooling of inflation – although not yet at the levels desired by the US central bank – have been however, undermined at the end of last week by the May US employment report, which, while highlighting an unemployment rate that rose to 4% in May, confirmed the creation of new jobs that was decidedly more solid than consensus estimates, describing an economy, the American one, which he is not issuing any SOS to the Fed at all.
This latest report on US employment has thus shuffled the cards on the table again, leading several economists to revise their expectations on the rate cuts that the Fed could launch during this year.
FT poll: just one cut in 2024?
Pay particular attention to new survey compiled jointly by the Financial Times and Chicago Boothwith which several experts were interviewed in the last week of May.
The outcome of the survey is not comforting for those with dovish expectations: More than half of the 39 economists surveyed said they believed that The Federal Reserve will cut interest rates only once, this yeardue to persistent inflation.
The expected rate cut is mini, as was that of the ECB, with the recent first euro area rate cut since the Draghi era, amounting to just 25 basis points.
About a quarter of those surveyed said, among other things, that they believe there will be no rate cut this year.
Last key data pre-announcement rates: May CPI on the radar
The last word, before the announcement on the fed funds rates arrives, will at this point be up to the macro front, from which it will be disseminated the other crucial parameter for evaluating the inflation trend, namely the CPI, consumer price index, which economists interviewed by Dow Jones expect to rise by 3.4% on an annual basis, at the same pace as in April, and to grow by 0.1% on a monthly basis, slowing down compared to +0, 3% of the previous month.
The core CPI index – which instead excludes the more volatile components represented by the prices of energy goods and food goods – is estimated up 3.5% on an annual basis and up 0.3% on a monthly basis, compared to +3.6% and +0.3% in April.
Without any shadow of a doubt the FOMC, the monetary policy arm of the Fed which met yesterday, and which will precisely announce the decision on rates today, will keep its eyes wide open when the inflation data is released, examining all components of the CPI index.
Not that a single macro data is enough guide the Fed’s monetary policy:
but, of course, the statements that Fed President Jerome Powell will release this evening could indicate very different scenarios, in the event that the CPI were to surprise on the downside or on the upside.
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The biggest fear is called dot plot. The Fed’s latest rate outlook
The greatest fear is that, in addition to the already evident decision of several economists to redo the calculations and now predict a decidedly lower quantity of rate cuts than previously forecast, it is the Fed itself that estimates a smaller number of cuts compared to previous ones.
To make it clear whether this fear is unfounded or not, it will be the dot plot, or the document that summarizes the direction of US fed funds rates expected by each individual Fed official:
that is the graph that Wall Street, on the Fed Days when its diffusion is expected, tends to consider carefully.
The latest dot plot was published in the FOMC meeting at the end of March this year, when Wall Street took action by pricing Powell & Co.’s decision to confirm the previous dot plot, which he had taken into account for 2024 three rate cuts, for a total of 75 basis points.
Being a graph released on a quarterly basis, Today’s new dot plot will attract the maximum attention of traders and experts.
The old March dot plot indicated that Fed bankers, in March, as well as earlier in December, they are considering three rate cuts for 2024, for a total of 75 basis points.
What would happen to the markets if today’s new dot plot revealed that Fed officials now estimate just one rate cut this yearthus confirming the outlook formulated by the majority of economists interviewed by the FT?
How many Fed cuts in 2024: Goldman Sachs’ outlook for 2024
While such an outcome is not ruled out, most experts expect the new dot-plot to signal average the scenario of two rate cuts during 2024 – therefore one cut less than the previous dot plots of March and December.
Interviewed by CNBC Jonathan Pingle of UBS he warned that, in the event that the Fed’s dot plot indicated only one rate cut in 2024, the first cut in US rates would not arrive before the November and December meetings.
There are different outlooks produced by economists: those of Goldman Sachs expect two rate cuts by the Fedwith the first expected in the September meeting, while Bank of America estimates only one, during 2024.
Definitely more dovish Citigroup’s research division, which considers three rate cuts possible, although its scenario is a new dot plot indicating two cuts for this year.
