The Federal Open Market Committee is unlikely to adjust rates at its upcoming meeting on June 11-12. However, fixed income markets will be watching closely for clues regarding interest rate cuts in 2024. Currently one or two cuts are viewed as the most likely scenarios, but policymakers will be updating their Summary of Economic Projections to estimate where they see rates at the end of this year.
Current Situation
It’s now been almost a year since the FOMC last raised the Federal Funds rate to its current target range of 5.25% to 5.5% in July 2023. Since then, rates have been held steady at all meetings. Over that period, we have seen further disinflation overall, but some relatively elevated inflation reports in the first quarter of 2024 “threw cold water” on possible rate cuts at the time, according to Fed Governor Christopher Waller at a May 21 speech at the Peterson Institute. However, later in that same speech Waller sounded some mild optimism on recent data stating: “The latest CPI data was a reassuring signal that inflation is not accelerating”
In addition, the FOMC have also signaled that weakness in the job market could cause them to move interest rates lower, but so far the job market has remained broadly robust in the FOMC’s view.
Expectations For Interest Rates
Currently the chance of an interest rate cut on June 12 is just 0.1% according to the CME’s FedWatch Tool which measures the likely path for short-term rates based on fixed income markets. Event forecasting site Kalshi currently gives a 99% chance that rates are unchanged when the FOMC meets in June.
At the last update of the FOMC’s Summary of Economic Projections on March 20, two or three interest rate cuts were forecast as the most likely outcomes for 2024 by policymakers. However, since then, the FOMC’s view has perhaps turned a little more hawkish given relatively strong jobs data and slowing progress on disinflation, when compared to the FOMC’s 2% annual inflation target.
What To Watch For
Though the FOMC’s June meeting is highly unlikely to see any change in interest rates, the markets will be watching carefully for signals for where rates may move later in 2024.
Most directly, in an update to the Summary of Economic Projections, policymakers will provide this forecast. In addition, Federal Reserve Chair Jerome Powell will take questions during his press conference that expand on the likely direction for monetary policy.
In recent months, Powell has suggested that weakness in the job market, should it occur, could prompt an interest rate cut. However, he has also signaled continuing confidence in the U.S. employment situation. If the FOMC’s confidence in the job market were to change that may prompt trigger rate cuts, even if inflation is not fully on track for its 2% target. Over recent months the job market has cooled, but the FOMC broadly believes that this is sign of the employment market now becoming more balanced, rather than a cause for concern.
When Could A Cut Come?
Fixed income markets project that September could see the first interest rate cut of this cycle. However, it’s not certain, that’s since the implied odds are about 50% currently. Then if two cuts were to happen in 2024, the second might come in December. However, again, this market-implied forecasts can adjust rapidly to economic news. For example, there is still a 15% chance of no cuts in 2024 according to fixed income markets.
Overall there is very little chance that the FOMC will surprise markets in June with an interest rate cut. Yet, markets are starting to expect that the Fed might start to set expectations that interest rates could move lower in September, or at least later in 2024.
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