The Bottom Line:
- US CPI data for May came in below expectations, with headline prices showing no change and core prices rising marginally.
- The Federal Reserve kept interest rates unchanged at 5.25-5.5% in the June meeting.
- Economic projections showed higher forecasts for headline and core CPI in 2024 and 2025, while the median Fed funds rate for 2024 was revised up to 5.1%.
- The dot plot chart revealed a more hawkish stance, with the majority of members expecting only one or two rate cuts in 2024, down from three in the March projections.
- Market expectations for a September rate cut initially increased to 70% after the CPI data but fell to around 60% following the FOMC meeting.
May CPI Data Shows Easing Inflationary Pressures
Inflation Eases in May, but Challenges Remain
The May CPI data released on Wednesday morning in the US (afternoon in Europe) showed a softening in inflationary pressures, coming in below market expectations. Headline CPI month-on-month growth came in at 0%, indicating that prices, including volatile components like energy and food, remained unchanged between April and May. While this is a positive sign, especially given the US economy’s struggles with bringing inflation under control, caution is warranted. A similar dynamic was observed in October 2023, with month-on-month headline inflation at 0%, only to pick up again in subsequent months, disrupting the disinflation process.
Core Inflation Slows, but Still Above Target
Headline year-on-year CPI growth came in at 3.3%, below expectations and unchanged from the previous month at 3.4%. Core prices, which exclude volatile components, rose to 3.4%, down from 3.6% and below the expected 3.5%. The divergence between headline and core CPI can be attributed to a drawdown in energy prices, which helped balance headline inflation to 0% month-on-month. Core inflation has followed a cleaner disinflation process, with the 3.4% reading being the lowest since April 2021. However, despite the positive step towards the 2% target, the US economy remains far from achieving this goal after 18 months of consecutive price pressures.
Market Reaction and Implications for Future Policy
The CPI data provided a positive takeaway for markets, especially following the higher-than-expected jobs data from the previous week, which had triggered a risk-off sentiment. The Federal Reserve’s decision to keep rates unchanged at 5.25% to 5.5% later in the day was widely anticipated. Market focus now shifts to commentary from Central Bank members regarding their views on the market reaction and the evolution of rate cut expectations in light of the latest CPI data. While the data suggests a step in the right direction, the Federal Reserve may need further confirmation of the disinflation process before considering rate cuts, given the still-elevated core inflation and the distance from the 2% target.
Federal Reserve Maintains Interest Rates at 5.25-5.5% in June Meeting
Federal Reserve Holds Rates Steady at 5.25-5.5%
As widely anticipated, the Federal Reserve maintained interest rates at the current range of 5.25% to 5.5% during its June meeting on Wednesday. The decision followed the release of the May CPI data earlier in the day, which showed a softening in inflationary pressures. Despite the positive signs from the inflation data, the Fed opted to keep rates unchanged, indicating that further confirmation of the disinflation process may be necessary before considering rate cuts.
Economic Projections and Dot Plot Chart Reveal Mixed Signals
The focus of the June meeting largely centered on the economic projections and the Dot Plot chart, which provides insights into where FOMC members see rates in the coming years. The updated projections presented a mixed picture, with GDP forecasts for the next three years remaining unchanged from the March projections. However, the unemployment rate for 2024 was left unchanged, while being revised higher for 2025 and 2026. Headline and core CPI projections were also raised for 2024 and 2025.
Shifting Expectations for Rate Cuts in 2024
The Dot Plot chart revealed a notable shift in expectations for rate cuts in 2024 compared to previous projections. In December 2023, the median expectation was for three rate cuts in 2024, with some members anticipating more aggressive easing. By March 2024, the majority of members still expected three rate cuts, which was seen as relatively dovish. However, the June Dot Plot showed a more hawkish stance, with no members expecting three rate cuts and the majority hovering around two cuts. The median projection now points to just one rate cut in 2024, down from three in the previous projections.
Economic Projections Reveal Higher Inflation Forecasts and Upward Revision in Fed Funds Rate
Upward Revisions in Inflation Forecasts and Fed Funds Rate
The Federal Reserve’s economic projections revealed higher inflation forecasts for the coming years, with both headline and core CPI projections being revised upward for 2024 and 2025. This suggests that the central bank anticipates a more persistent inflationary environment than previously expected. In line with these projections, the median Fed Funds Rate forecast for 2024 has also been raised to 5.1% from the 4.6% projected in March, indicating a more hawkish stance on monetary policy.
Dot Plot Chart Signals Fewer Rate Cuts in 2024
The Dot Plot chart, which illustrates the individual rate projections of FOMC members, has undergone significant changes since the December 2023 meeting. In December, the median expectation was for three rate cuts in 2024, with some members anticipating even more aggressive easing. However, the June Dot Plot shows a notable shift, with no members expecting three rate cuts and the majority now projecting only one or two cuts. This change in expectations reflects a more cautious approach to monetary policy easing, as the Federal Reserve assesses the evolving economic landscape and the progress made in bringing inflation under control.
Market Reaction and Policy Implications
The combination of higher inflation forecasts and a more hawkish Dot Plot has led to some confusion in financial markets. The fact that some FOMC members still expect up to two rate cuts in 2024, despite the upward revisions in inflation projections, has raised questions about the consistency of the Fed’s messaging. Market participants are now eagerly awaiting further commentary from Federal Reserve officials to clarify their views on the evolving rate cut expectations and the implications of the latest CPI data. While the CPI figures suggest a step in the right direction, the Federal Reserve may require more convincing evidence of a sustained disinflation process before committing to a path of monetary policy easing.
Dot Plot Indicates More Hawkish Stance, Fewer Expected Rate Cuts in 2024
Shifting Expectations for Rate Cuts in 2024
The Dot Plot chart, which illustrates the individual rate projections of FOMC members, has undergone significant changes since the December 2023 meeting. In December, the median expectation was for three rate cuts in 2024, with some members anticipating even more aggressive easing. However, the June Dot Plot shows a notable shift, with no members expecting three rate cuts and the majority now projecting only one or two cuts. This change in expectations reflects a more cautious approach to monetary policy easing, as the Federal Reserve assesses the evolving economic landscape and the progress made in bringing inflation under control.
Conflicting Signals and Market Confusion
The combination of higher inflation forecasts and a more hawkish Dot Plot has led to some confusion in financial markets. The fact that some FOMC members still expect up to two rate cuts in 2024, despite the upward revisions in inflation projections, has raised questions about the consistency of the Fed’s messaging. This apparent contradiction has left market participants seeking further clarification from Federal Reserve officials regarding their views on the evolving rate cut expectations and the implications of the latest CPI data.
Awaiting Further Commentary for Clarity
Market participants are now eagerly awaiting further commentary from Federal Reserve officials to shed light on the apparent discrepancies between the revised economic projections and the expectations for rate cuts in 2024. While the CPI figures suggest a step in the right direction, the Federal Reserve may require more convincing evidence of a sustained disinflation process before committing to a path of monetary policy easing. The upcoming commentary from central bank members will be crucial in providing clarity on their assessment of the economic situation and their intentions regarding future rate adjustments.
Market Expectations for September Rate Cut Fluctuate Following CPI Data and FOMC Meeting
Market Expectations Shift Following CPI Data and FOMC Meeting
Market expectations for a September rate cut have fluctuated following the release of the May CPI data and the Federal Reserve’s June meeting. The CPI data, which came in below expectations, initially boosted the likelihood of a rate cut in September to 70%. However, this optimism was tempered by the FOMC meeting, which revealed a more hawkish stance than anticipated. The updated economic projections and the Dot Plot chart signaled fewer expected rate cuts in 2024, with the median projection now pointing to just one cut, down from three in the previous projections.
Conflicting Signals Lead to Market Confusion
The combination of the positive CPI data and the hawkish FOMC meeting has led to some confusion in financial markets. While the CPI figures suggest a step in the right direction, with headline inflation remaining unchanged and core inflation slowing, the Federal Reserve’s projections indicate a more persistent inflationary environment than previously expected. The apparent contradiction between the revised economic projections and the expectations for rate cuts in 2024 has left market participants seeking further clarification from Federal Reserve officials.
Focus Shifts to Commentary from Central Bank Members
As a result of the mixed signals from the CPI data and the FOMC meeting, market focus has now shifted to upcoming commentary from Central Bank members. Investors and analysts are eager to hear their views on the evolving rate cut expectations and the implications of the latest economic data. The remarks from these officials will be crucial in providing clarity on the Federal Reserve’s assessment of the economic situation and their intentions regarding future rate adjustments. In the meantime, the market continues to price in a 60% chance of a 25 basis point cut in September, with a full 25 basis point cut expected by November.
