Federal Reserve preview: More delays

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The US Federal Reserve will keep interest rates unchanged at 5.25-5.5% on Wednesday and will indicate that September is the earliest opportunity to seriously consider an interest rate cut. The main focus will be their updated dot plot, which outlines the individual members’ views on the path for interest rates. In March, they signalled that three rate cuts for the year remained their central view, with three further cuts in 2025. There had been a sense they could have instead opted for just two rate cuts in 2024 in the wake of two consecutive 0.4%MoM core CPI prints and ongoing strong jobs numbers, but they decided to bide their time. It was close, with 2 members opting for no change this year, 2 for one cut, 5 for 50bp of cuts, 9 for 75bp and 1 for 100bp.

With inflation having remained sticky and the latest jobs numbers beating all expectations, we expect them to push their projections for rate cuts back next week, so they end up with two cuts in 2024 and four in 2025 instead of three and three. It is a close call and recognises that a Bloomberg survey showed 41% of respondents (including ING) look for two cuts in 2024, but there are also 41% who expect the Fed to signal one or none.

Lower growth and higher unemployment is why we don’t expect the Fed to go further

We don’t expect them to change their projections for the fourth-quarter core PCE deflator (2.6%) meaningfully, perhaps up to 2.7% or, at a stretch 2.8%, but there is a high chance they lower their 4Q GDP YoY growth projection (2.1%) closer to the 1.7% consensus forecast and raise their 4Q unemployment projection (currently 4%) to the consensus 4.1% or possibly 4.2% given we are already up at 4.0% and labour demand indicators are weakening.

The probability of lower GDP growth and higher unemployment is why we don’t expect the Fed to go further and reduce it to just one 25bp rate cut as their central view for 2024. Moreover, two rate cuts for 2024 would be closer to the market pricing, and they can emphasise it is the data that will determine the path forward for rates rather than implying they have a pre-determined take-off plan. Nonetheless, it is likely to be so close that one or two more hawkish members would have tipped the median to one cut. If that is the case, we expect Powell’s press conference to signal this isn’t set in stone, and if the data warrants it, they can do more – they won’t want to be categorical about the outlook for rates.