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Macro

Fed Faces Dot-Plot Cliffhanger as May CPI Report Looms, Rate Cuts in Focus

Fed's Dot Plot Hinges on May CPI Data, Economists Split on 2024 Rate Cuts

6/11, 19:28 EDT
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Key Takeaway

  • The Fed's upcoming rate projections hinge on the May CPI report, potentially reducing expected 2024 rate cuts.
  • Economists are split, with 41% predicting two cuts in 2024 and another 41% expecting one or none.
  • Fed Chair Powell will likely address inflation data and potential rate cuts during his press conference.

Fed's Rate Projections Await Key Inflation Data

Federal Reserve officials are poised to finalize their closely watched interest rate projections, contingent on the release of the May consumer price index (CPI) report. The CPI data, scheduled for release at 8:30 a.m. New York time on Wednesday, will be pivotal in shaping the Fed's "dot plot," which outlines the expected path of interest rates. Diane Swonk, chief economist at KPMG LLP, emphasized, "You are going to get inflation data during the meeting, and that is what is going to determine the dots."

The Federal Open Market Committee (FOMC) is expected to maintain its benchmark rate steady for the seventh consecutive meeting, awaiting more evidence that inflation is moving towards its 2% target. The rate decision and projections will be released at 2 p.m. in Washington, followed by a press conference with Fed Chair Jerome Powell at 2:30 p.m.

Projections and Market Expectations

A Bloomberg survey indicates that a 41% plurality of economists expect the median rate projection to signal two cuts in 2024, while another 41% foresee just one or no cuts at all. This reflects the Fed's cautious stance amid persistent inflationary pressures. Derek Tang, an economist with LH Meyer/Monetary Policy Analytics, noted, "They do see some upside risks. That means easing very carefully, making sure that they’re not over-easing and inadvertently boosting the economy."

Policymakers are likely to adjust their 2024 inflation estimates upwards due to higher-than-expected readings in the first quarter. Additionally, the unemployment rate projection may be revised following a recent report showing it climbed to 4% in May, the highest level in over two years. Anna Wong, chief US economist at Bloomberg, stated, "The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version."

Market Reactions and Economic Indicators

Wednesday's events are expected to pack significant macroeconomic risk into a single day. UBS economist Jonathan Pingle remarked, "The day packs months of macro risk into one day." The CPI report is anticipated to show a 0.1% month-over-month increase, translating to an annual rise of 3.4%. Excluding food and energy prices, the core CPI is projected to show a 0.3% monthly gain and a 3.5% annual rate. These figures, while still above the Fed's 2% target, suggest a gradual disinflationary trend.

The FOMC's Summary of Economic Projections will be closely scrutinized for any adjustments to the "dot plot." Goldman Sachs economists expect two rate cuts, with the first potentially coming in September. David Mericle, chief US economist at Goldman Sachs, noted, "Our conviction remains limited because we continue to see cuts as optional." The Fed's long-run rate could also see a slight increase, reflecting ongoing inflationary pressures from factors like deglobalization and increased spending on artificial intelligence and infrastructure.

Street Views

  • Diane Swonk, KPMG LLP (Neutral on inflation data's impact on Fed decisions):

    "You are going to get inflation data during the meeting, and that is what is going to determine the dots. The ultimate determinant is going to be the inflation numbers."

  • Derek Tang, LH Meyer/Monetary Policy Analytics (Cautiously Optimistic on Fed easing policy):

    "They do see some upside risks. That means easing very carefully, making sure that they’re not over-easing and inadvertently boosting the economy."

  • Anna Wong, Bloomberg Economics (Neutral on rate-cut timetable):

    "The June FOMC meeting will be one of the most pivotal this year as Powell may provide the clearest hint yet as to the rate-cut timetable. The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version."

  • Stephanie Roth, Wolfe Research (Neutral on economic momentum and consumer health):

    "People might ask him about the softening momentum and how they think about it... He is likely to say they are monitoring it, and so far the consumer seems to be OK — maybe some cracks from the low end — but this is something that they’re keeping a close eye on."