July 19, 2024

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The Fed is expected to dial up interest rates for 2024 after digesting new inflation data

The Fed is expected to dial up interest rates for 2024 after digesting new inflation data

Investors are preparing for Federal Reserve officials this afternoon to scrap estimates of interest rate cuts in 2024.

Before policymakers announce these forecasts, they get a new inflation reading from the Consumer Price Index (CPI) which is expected to show continued moderation in May after an encouraging April.

The year-over-year change in the so-called “core” CPI — which excludes volatile food and energy prices that the Fed cannot control — is expected to fall 0% to 3.5%, compared with 3.6% in April. And 3.8% in March.

However, this improvement is unlikely to change the dovish stance of the Fed, which at today’s policy meeting is widely expected to keep interest rates steady at their highest level in 23 years.

It will release new projections about interest rate cuts for 2024 in the form of a so-called “dot chart,” a chart updated quarterly that shows each Fed official’s expectations about the direction of the federal funds rate.

In March, dot charts revealed a consensus among Fed officials on three cuts. Now that forecast has been called into question after a series of sticky inflation readings during the first quarter and dovish comments from Federal Reserve officials.

Most investors now expect just one cut, down from the six they expected at the start of the year.

On Wednesday, Fed officials will also release new forecasts for inflation, the economy and unemployment.

FILE - Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Bank in Washington, May 1, 2024. On Wednesday, June 12, 2024, the Fed will end its final meeting by issuing a policy statement, updating its economic policies and interest rate forecasts and holding a news conference with Powell .  (AP Photo/Susan Walsh, File)

Federal Reserve Chairman Jerome Powell. (AP Photo/Susan Walsh) (News agency)

Fed Chairman Jay Powell made clear that before cutting interest rates, the Fed would need more than a quarter of the data to make a judgment on whether inflation is falling steadily toward the central bank’s 2% target.

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Hence, many view the September meeting as an optimistic case for a first step. For that to happen, today’s inflation report and the two that will follow in the coming months will likely need to show improvement for the central bank to pull the trigger.

As of Tuesday, markets were pricing in a roughly 48% chance that the Federal Reserve would start cutting interest rates at its September meeting, According to CME Group data.

Many Fed watchers view the November and December meetings as more likely opportunities for a first cut.

The Fed will announce its policy decision at 2 pm ET, followed by Powell’s press conference at 2:30 pm ET.

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