Against the backdrop of weak US economic growth and persistent inflationary pressures, it is widely expected that the Federal Reserve (Fed) will maintain its current interest rate policy in its rate decision this Thursday. At the same time, internal discussions within the Fed seem to be shifting from how many interest rate cuts should be made this year to whether interest rate cuts should be made at all.
The US Department of Commerce released the latest data on the 25th, which showed that the annualized growth rate of US GDP in the first quarter of this year was only 1.6%, while the core personal consumption expenditure price index (PCE) for the same period increased by 3.7%, the largest increase in a year, exceeding market expectations. This data indicates unexpectedly weak economic growth and persistently high inflationary pressures.
In this context, it is widely expected that the Fed will maintain its current policy unchanged at its May rate decision this Thursday. According to the CME Group’s FedWatch Tool, the probability of maintaining the current interest rate policy in May is as high as 95.9%.
With inflation data for the first three months of the year in the US exceeding expectations, Fed Chairman Jerome Powell indicated earlier this month at an economic forum that it may take longer than expected to have confidence in inflation falling back to the central bank’s 2% target.
Fed officials also emphasized the need to maintain high interest rates as necessary and hinted at delaying interest rate cuts. At the same time, the possibility of no interest rate cuts this year is increasing. Dean Maki, Chief Economist at Point72, pointed out that if inflation data does not significantly improve, the Fed will indefinitely maintain its current policy.
Recently, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, and other Fed officials such as John Williams, President of the Federal Reserve Bank of New York, and Raphael Bostic, President of the Federal Reserve Bank of Atlanta, have also expressed that there is no rush to cut interest rates and even support further rate hikes if necessary.
In the market’s expectation that interest rates will remain unchanged, all investors’ attention will turn to Chairman Powell’s press conference after the rate decision this week. The market expects Powell to deviate from the dovish stance he has taken for the past six months and release a hawkish tone.
Marc Giannoni, Chief Economist at Barclays Bank, stated that the resurgence of inflation this year may make Powell’s stance more hawkish, and Diane Swonk, Chief Economist at KPMG, agreed, believing that Powell may use hawkish rhetoric to ease market expectations of loose policy.
In addition, Carl Tannenbaum, Chief Economist at Northern Trust Bank, believes that Fed officials’ confidence in reaching the 2% inflation target has “reset” due to recent data. The question to be addressed next is how many months of benign data officials need to regain confidence in inflation decline.
Dean Maki, economist at Point72, believes that at least three months of good inflation data are needed to discuss interest rate cuts, so this may push the discussion on rate cuts to September or later. Giannoni from Barclays also pointed out that analysts at the bank believe September is the earliest opportunity for rate cuts, but it is not ruled out that the first rate cut will take place in December, with only one rate cut expected this year.
These discussions highlight three key questions that need to be closely watched in this week’s and future rate decisions: whether the Fed is losing ground in its fight against inflation, whether there is a possibility of rate hikes, and when the earliest rate cut may take place.