Macro

Investors Eye Fed Decision, Expect 1-2 Rate Cuts in 2024

Investors expect two rate cuts this year, with the first in September, amid minimal CPI inflation changes.

By Athena Xu

6/11, 16:02 EDT
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Key Takeaway

  • Investors expect minimal market disruption from the Fed's meeting, with projections of one to two rate cuts in 2024.
  • The S&P 500 has risen over 12% in 2024, reflecting investor optimism despite mixed economic signals and potential Fed surprises.
  • Concerns linger about a possible correction, especially for large-cap tech stocks like Nvidia, amid higher-for-longer interest rates.

Fed Meeting and Inflation Data

Wednesday is poised to be a pivotal day for investors, with the release of fresh inflation data in the morning and a new summary of economic projections from the Federal Reserve in the afternoon. Market observers largely expect that the Fed event will be uneventful, as investors have already priced in potential interest rate moves. The CME FedWatch Tool indicates that markets are pricing in roughly two rate cuts this year, with the first expected in September. Art Hogan, chief market strategist at B. Riley Financial, remarked, "I suspect that all of that comes and goes without too much market disruption." Similarly, Dave Sekera, chief U.S. market strategist at Morningstar, stated, "I suspect it’s actually going to be probably a pretty boring, relatively uneventful meeting."

However, there remains a possibility for surprise. A move to just one rate cut could be more distressing than two, which Hogan called a "near-term market negative." Additionally, a more hawkish stance by Fed Chair Jerome Powell could unsettle stocks. Brian Nick, senior investment strategist at the Macro Institute, noted, "That will put the press conference in greater focus, because Powell will have to explain how the Fed can be missing on both of its mandates."

CPI Inflation Expectations

The Consumer Price Index (CPI) for May is expected to show minimal month-over-month movement, with a projected 0.1% increase from April, equating 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 numbers still indicate inflation running above the Fed’s 2% target. Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, commented, "On the inflation front, expect more of the same – continued evidence that the broader disinflationary trend is still intact."

The CPI report, scheduled for release at 8:30 a.m. ET on Wednesday, will be closely watched, though it is not the primary metric used by the Fed. Central bankers prefer the Commerce Department’s measure of personal consumption expenditures prices, which accounts for changes in consumer behavior.

Market Reactions and Projections

The options market is betting the S&P 500 Index will move 1.3% to 1.4% in either direction by Friday, based on the price of at-the-money straddles that expire that day. Andrew Tyler, head of US market Intelligence on JPMorgan Chase’s trading desk, noted, "With CPI and Fed on the same day there is a possibility of a CPI outcome being reversed by Powell’s press conference." If the core CPI tops 0.4%, it could spur a selloff across all risk assets, with the S&P 500 potentially falling between 1.5% to 2.5%. Conversely, a core CPI reading below 0.2% could spark a rally of between 1.75% to 2.50% in the S&P 500.

Street Views

  • Art Hogan, B. Riley Financial (Neutral on the market):

    "This is one of the busiest of the days on Wednesday... But I suspect that all of that comes and goes without too much market disruption."

  • Dave Sekera, Morningstar (Neutral on Fed meeting impact):

    "I suspect it’s actually going to be probably a pretty boring, relatively uneventful meeting."

  • Brian Nick, Macro Institute (Cautiously Optimistic on stock volatility):

    "It would sort of put Fed policy into a little bit of a bind if you have inflation staying higher than the Fed would like, [and] unemployment also rising more than the Fed expected... So, I think it’s set up for volatility."
    "I’d be surprised if the Fed’s going to message anything that’s so shocking that it’s going to send the markets more than 2% in either direction."

  • Jeff Klingelhofer, Thornburg Investment Management (Bearish on large caps and U.S. economy):

    "I think markets will be forced to come to a reckoning ... that underlying growth is slowing."