It is highly unlikely that the US Federal Reserve's policy-setting committee, the Federal Open Market Committee (FOMC), will announce a rate cut on Wednesday, June 12, after a two-day meeting. Still, in his press conference after the policy announcement, hopes are high that Fed Chair Jerome Powell will reveal the Fed's assessment of inflation and growth trajectory and offer hints on the timeline for rate cuts.
Experts point out that the key elements to monitor in the upcoming Federal Reserve meeting in June 2024 include inflation trajectory, growth outlook, labour market conditions, the pace of quantitative tightening, and policy guidance.
Experts are divided on the prospects of rate cuts this year. Some expect the start of the rate cut cycle in September, while others believe there will be no rate cuts this year at all. Most say that even if there is a rate cut, it will be shallow.
According to CME Group's Fedwatch Tool, traders have scaled back their bets on rate cuts this year and now expect only two cuts. At the start of the year, there were expectations that the Fed would cut rates 5-6 times this year.
Recent macro data in the US have shown that the US job market remains tight and inflation is still hot. With economic indicators in the green, the Fed has ample reasons to keep rates at the current level of 5.25-5.50 per cent, a 23-year high.
Mint spoke to several experts for their insights on when the US Fed may cut rates. Here's what they said:
Inflation remains a primary concern for the Fed, with retail and Personal Consumption Expenditure (PCE) inflation rates still above the 2 per cent target.
This persistent inflation will likely prevent the Fed from cutting rates in June. The impact of prolonged high interest rates on economic growth will also be considered.
Although the labour market remains relatively strong, slight increases in unemployment and a tight job market could influence the Fed's decisions.
The Fed is expected to slow down liquidity withdrawal, a move closely watched by market participants. Lastly, the Fed chairman's guidance on potential rate cuts later in the year will be highly anticipated.
"We expect the Fed to begin cutting rates by September 2024, in line with the consensus forecast," said Hajra.
The Fed is widely expected to keep its benchmark rate steady this week, as the decline in inflation has not shown as much progress as the Fed would have liked since the start of 2024.
The dot plot charts the Fed's expectations of the Fed Funds Rate, indicating two rate cuts in 2024 back in March.
The market will look for any changes in the Fed's indicated rate cut path through the dot plot and changes to its GDP and inflation forecasts.
With labour data coming in hotter last week and inflation having been hotter than expected since the start of 2024, Chairman Powell may be a tad more hawkish in his post-meeting press conference
"We have been arguing since early this year that the Fed will not cut rates in CY24, with the first cut probably coming sometime in late Q1CY25. However, we are sceptical of the widespread optimism for an immaculate disinflation that would open the door for a significant Fed easing cycle," said Arora.
Key things to observe in Fed policy in June include updates on the pace of balance sheet runoff and economic projections, particularly for GDP growth, unemployment, and inflation.
Investors will scrutinise the Fed's stance on future rate cuts, especially given mixed inflation data and signs of economic slowdown.
The May jobs report and upcoming inflation data will also heavily influence the Fed's decisions and economic outlook.
According to the bond market, investors potentially anticipate the first Fed rate cut at the September 2024 meeting, with a 47.6 per cent probability.
The likelihood of at least two rate cuts by the end of the year is also significant, at 36.9 per cent.
However, this timeline is contingent on continued positive inflation data and economic conditions.
Persistent sticky inflation and economic growth indicators will play a crucial role in determining the exact timing of rate cuts, with the Fed needing to balance inflation control with economic stability.
The strong US jobs data for May, released last Friday, seems to have dampened the expectations of a US interest rate cut anytime soon.
Further, inflationary trends also need to witness further cool-off before a rate cut materialises.
Looking at the overall US economic scenario, the markets are currently factoring in 1-2 rate cuts, but the timing still remains open, given the strength of the US economy.
However, markets do expect rate cuts in the second half of the current year, so till such time, it's a wait-and-watch policy.
The primary focus will be on the interest rate decision, as the consensus is that rates will remain unchanged. However, any indications of future rate adjustments will be significant.
Economic projections, including GDP growth and unemployment updates, will provide further insight. Lastly, the tone and language used by Fed officials will be closely analysed for hints about their confidence and concerns regarding the economic outlook and potential policy shifts.
The start of the Fed rate cut cycle is anticipated from September. While no immediate changes in interest rates are expected, the meeting's guidance or signals regarding future rate cuts will be pivotal.
Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
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