The U.S. Federal Reserve is set to hold rates steady at its next meeting on May 1 but may provide hints on how it plans to address the increase in inflation reported so far in 2024. Despite most inflation metrics showing disinflation over a 12-month period, there has been an acceleration in inflation recently. The path to the Fed’s 2% inflation target is now less certain, with current annual inflation rates between 3% to 5% depending on the metric used. The expectation is for the Fed to hold rates high for longer in response to inflation data but still cut rates in 2024.
In its March statement, the Federal Open Market Committee noted strong job gains and elevated inflation, stating that risks to achieving employment and inflation goals are moving into better balance. The Committee does not expect to reduce the target range until it has greater confidence that inflation is moving sustainably toward 2 percent. Changes in language in the upcoming statement may indicate a shift in policymakers’ stance on interest rates, potentially spooking markets if further rate hikes are suggested. However, falling shelter costs could help move inflation lower.
Currently, the CME Group’s FedWatch Tool sees an 18% chance of rates being held steady for the rest of 2024, with no chance of an increase from the current level of 5.25% to 5.5%. The most likely outcome is expected to be one or two interest rate cuts in 2024. The upcoming release of April’s Consumer Price Index data on May 15, followed by May’s figures on June 12, will be crucial in determining future Fed actions. If monthly inflation returns to a more moderate increase of around 0.2%, the FOMC may feel confident in cutting rates. However, if inflation remains in the 0.3% to 0.4% range as in recent months, the FOMC may need to reconsider rate cuts.
Market expectations are currently focused on the upcoming FOMC meeting and how the Fed plans to address inflation concerns. The recent acceleration in inflation has raised questions about whether the Fed will need to reconsider its stance on interest rates. The upcoming data releases will be key in determining the path forward for the Fed and whether rate cuts in 2024 are still likely. As inflation rates remain elevated, policymakers will need to carefully consider their next steps to ensure economic stability and growth.
