La Française: What's next for Fed rate cuts?

La Française: What's next for Fed rate cuts?

Interest Rates Fed
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By François Rimeu, Senior Strategist, La Française AM

The Federal Open Market Committee (FOMC) is expected to leave its key rates unchanged at its June meeting. However, new economic projections will likely signal fewer rate cuts later this year, with two cuts of 25 basis points (bp) each, which would lower the policy rate from 5.4% to 4.9% by the end of the year.

Please find below what we expect:

  • The Federal Reserve will keep interest rates on hold at a target range of 5.25% to 5.50%, unchanged since July 2023.
  • Fed Chair Powell will reiterate that the Fed needs greater confidence that inflation is decelerating before it can begin cutting the policy rate, even though the April inflation data is reassuring after three consecutive months of upside surprises. He will underline that the committee would also consider reducing policy rates in the case of a weakening labor market.
  • Mr. Powell should remain ‘cautiously optimistic’ by reaffirming that inflation will move lower toward 2% over the medium term (by 2026) with the labor market rebalancing and the slowing economic momentum in the face of restrictive monetary policy.
  • He will also indicate that the current monetary policy is sufficiently restrictive. Consequently, Jerome Powell will reaffirm that further increases in the policy rate are probably unnecessary.
  • The new ‘Summary of Economic Projections’ (SEP) should evolve as follows:
    • We expect two cuts (50 bp) this year, with the median of the federal funds rate target range at 4.9% (compared to the March SEP at 4.6%), four additional cuts (100 bp) next year, which would leave the funds rate at 3.9%, then three cuts in 2026 (75 bp), lowering the policy rate to 3.1%. Expectations for the longer-run dot are likely to remain unchanged at 2.6%.
    • The growth forecast will be quite similar to the March forecasts.
    • Projections for core PCE inflation (Personal Consumption Expenditures excluding food and energy) will be two-tenths higher this year at 2.8% and broadly unchanged for the next two years at 2.2% in 2025, and at the 2.0% Fed’s objective in 2026.
    • Expectations for the unemployment rate could be revised a little bit higher.

In summary, Jerome Powell will repeat that the Fed will stay on hold until the inflation outlook will return sustainably to the 2% target. However, this meeting may bring some volatility given the uncertainty over how many times the Fed will cut rates this year and the release of the May CPI data on the same day as the FOMC announcements.