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Update, June 12, 2024: This article has been updated to include information on Wednesday morning’s inflation report and updated trader expectations.
Key Takeaways
- The Federal Reserve is widely expected to keep its benchmark interest rate steady at its current range of 5.25-5.5% when it announces a policy decision Wednesday.
- The Fed is keeping interest rates high to stifle inflation, at the cost of cooling the economy, and officials are determined to keep them high until they’re certain inflation has been subdued.
- With little chance of rate movement in either direction, Wednesday’s announcement will reveal more about how Fed officials view the outlook for rate cuts later in the year.
Don’t expect the Federal Reserve to make any changes to monetary policy, but Wednesday’s meeting of the Federal Open Market Committee could shed light on when the central bank might lower interest rates.
When the Fed’s policy-setting committee concludes its two-day meeting Wednesday, they’re widely expected to keep the influential fed funds rate at its current range of 5.25-5.50%. That’s a 23-year high and has been at that level since last July in an effort to maintain downward pressure on inflation.
Rates Aren’t Likely to Budge
Should the Fed either raise the rate to squeeze inflation harder or lower it to stimulate the economy, it would come as a massive surprise to financial markets. Traders are mainly pricing in a September rate cut at the earliest, according to the CME Group’s Fedwatch Tool, which forecasts rate movements based on fed funds futures trading data.
On Wednesday, the Bureau of Labor Statistics' Consumer Price Index report showed that prices were virtually unchanged in May.
In light of the inflation report, traders expanded their bets for a September cut to 72.7%, up from 50.8% on Friday, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. They’re also pricing in a nearly 96% chance of a rate cut in December.
Movement in the influential interest rate either way would also contradict the recent public statements of central bank officials, who have signaled they’re willing to hold the fed funds rate higher for longer.
Fed policy committee members have said they’re waiting for confidence that inflation is firmly on a path down to an annual rate of 2% before they’ll consider lowering their key interest rate, which influences borrowing costs on all kinds of loans.
Recent reports showing inflation slowly decreasing may have eased fears that price increases are accelerating. However, it is unlikely to have convinced policymakers that inflation is vanquished, leaving the Fed in a holding pattern.
All Eyes Will Be On Projections, Powell
With the rate movement (or lack thereof) a foregone conclusion, the FOMC members’ quarterly economic projections, especially for the path of the fed funds rate, are likely to garner more interest.
The last time Fed officials made those projections, in March, the median outlook was for three quarter-point rate cuts in 2024. But with 2024 half over and inflation remaining more stubborn than anticipated, the prospect for three rate cuts is diminishing, making just one or two more likely.
“We see the Fed revising its outlook in favor of slower growth and firmer inflation,” Michael Gapen, U.S. economist at Bank of America Securities wrote in a commentary. “It should project two rate cuts this year and a cutting cycle that begins in September.”
Those projections could be influenced by the report on the Consumer Price Index for May, which is set to be released Wednesday morning, hours ahead of the afternoon Fed announcements. Higher-than-expected inflation could even revive talk of possible rate hikes, Chris Clarke, assistant professor of economics at Washington State University, told Propedia.
"If it comes out strong, we’re going to see them change their tune about what they believe will happen at the end of the year," he said. "But if it comes out soft, they might say, Yeah, rate cuts are still on the table."
As usual, the comments of Fed Chair Jerome Powell at his post-announcement press conference could inform the interest rate outlook and move markets.
A hot topic at recent conferences has been whether the Fed would raise interest rates even more, given the hotter-than-expected inflation data at the outset of the year. In the past, Powell has said that’s unlikely, a message that Gapen expects him to repeat.