ANALYSIS - US Fed to remain data dependent before starting rate cuts

By Ovunc Kutlu

ISTANBUL (AA) - The US Federal Reserve is expected to remain dependent on incoming macroeconomic data before starting to cut interest rates.

The central bank’s two-day monetary meeting will conclude on Wednesday, and it is widely expected to keep its federal funds rate unchanged in the 5.25%-5.5% target range – the highest level in 23 years.

All eyes will be on Chair Jerome Powell’s comments in his post-meeting press conference, with analysts and investors trying to get hints about the bank’s moves in the coming months.

Powell told the US Congress earlier this month that the Federal Open Market Committee (FOMC) members believe that its policy rate is “likely at its peak for this tightening cycle.”

Although the Fed is not expected to make another interest rate hike on Wednesday, nor in May, there remains uncertainty over when the FOMC will decide to begin rate cuts this year.

The earliest expectation mostly is June.

The probability of a rate cut of 25 basis points at the Fed’s June 12 meeting stood at 58.1% as of Wednesday, according to the FedWatch Tool provided by the US-based Chicago Mercantile Exchange Group.

“We’re waiting to become more confident that inflation is moving sustainably at 2%,” Powell told the US Senate Committee on Banking, Housing and Urban Affairs.

“Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

- Stubborn inflation

Despite the Fed’s best efforts, raising interest rates by a total of 525 basis points in 11 meetings from March 2022 to July 2023 to fight record inflation, consumer inflation in the US was up 3.2% annually in February, with a monthly 0.4% gain, both above market expectations.

Producer inflation in February rose 1.6% annually and 0.6% on a monthly basis, also above market estimates.

The Fed’s preferred inflation indicator, the core personal consumption expenditures (PCE) price index, rose 2.8% annually and 0.4% monthly in January.

Many FOMC officials have recently become vocal about the difficulties in bringing down stubborn inflation.

Michael Barr, Fed vice chair of supervision, said in February that returning inflation to the central bank’s target of 2% could be a “bumpy” path.

He said FOMC members are always assessing the risk of an economic slowdown that could reduce employment, and the eventuality that inflation does not stay on its path to return to the Fed’s goal of 2%.

Tom Barkin, president of the Federal Reserve Bank of Richmond, said in early February it would be “smart for us to take our time” in starting to lower interest rates.

“Looking forward, I am hopeful but still looking for more conviction that the slowing of inflation is broadening and sustainable,” he said.

“No one wants inflation to reemerge, and given robust demand and a historically strong labor market, we have time to build that confidence before we begin the process of toggling rates down.”

- Focus on new projections

The discourse of gaining more confidence in incoming macroeconomic data has become prevalent among FOMC members in order to start lowering interest rates.

“We still expect the Fed to cut interest rates in June, although we don’t expect officials to provide a strong steer either for or against at the next FOMC meeting,” Capital Economics, a London-based independent economic research firm, said on Monday.

“The updated Summary of Economic Projections should show an upward revision to GDP growth for this year with core PCE inflation modestly above the 2% target by year-end,” it added.

The projection materials the Fed will release Wednesday include estimates about GDP, unemployment, PCE inflation, core PCE inflation, and most importantly, the FOMC members’ expectations for the future path of the federal funds rate.

The Fed’s last projections materials released on Dec. 13 indicated that the central bank could make at least three interest rate cuts of 25 basis points each during 2024.

“We expect the median projection to still show three 25 basis points of rate cuts this year, although it would only require one or two centrist officials to shift their stance to move that median projection to two cuts,” said Capital Economics.