Inflation is high and the central bank is limiting its rate cut plans

(Bloomberg) — Economists are divided on how many interest-rate cuts Federal Reserve officials will deliver through 2024 at their policy meeting next week, following a pop in the latest inflation numbers.

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Policymakers are likely to back away from their long-held forecast of three rate cuts this year, but it’s a close call on whether or not they’ll pencil in two more. According to a Bloomberg survey, 41% of economists expect the “dot plot” to show two cuts, while 41% expect the forecast to show one or no cuts.

The Federal Open Market Committee, which has held its benchmark rate at a two-decade high since last July, was encouraged to pencil in a gradual rate cut for this year due to a sharp decline in inflation in the second half of 2023. But those plans have been pushed back following a lack of progress towards a 2024 launch.

“The central bank awaits a string of data that reinforces confidence that inflation is on a steady path toward its 2% target,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a survey response. “The balance of risks to our forecast for inflation remains to the upside.”

The authorities are all set to keep rates steady in the range of 5.25% to 5.5% for the seventh consecutive meeting next week. Chairman Jerome Powell and his colleagues will update their economic and rate forecasts for the first time since March at a June 11-12 meeting.

Fewer cuts mean a later start to cuts. That could have implications for November’s presidential election, though central bank officials uniformly say their decisions are based solely on economic considerations.

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Fed watchers expect the first cut to come at the central bank’s September policy meeting, the final meeting before voters go to the polls on November 5. They expect policymakers to raise their 2024 inflation estimates slightly, while reiterating forecasts for US aggregate growth. Domestic production grew at an annual rate of 2.1% and the year-end unemployment rate was 4%.

A survey of 43 economists was conducted from May 31 to June 5.

Most of those surveyed said the central bank would cut rates in response to lower inflation rather than some shortfall in the labor market or an economic shock. None of the economists said the next rate move would be higher — an outcome occasionally noted by officials such as Minneapolis Fed President Neel Kashkari.

With inflation still stable and the outlook for growth solid, many central bankers have suggested in recent weeks that they are in no rush to cut rates. Inflation was 2.7% in the year to April, according to the central bank’s preferred measure, and compared with lower monthly figures in late 2023, economists expect relatively little progress toward the central bank’s 2% target in the second half of the year.

Ahead of a self-imposed quiet period, Fed Governor Christopher Waller said the central bank may consider cutting rates “later this year,” echoed by Atlanta Fed President Rafael Bostic. Cleveland Fed President Loretta Mester said she wanted to see “a few more months of inflation data coming down,” while the Boston Fed’s Susan Collins said “patience is very important.”

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Almost all respondents expect the Fed to maintain its May 1 guidance, with the Fed more confident that no rate cut is appropriate until inflation moves steadily toward 2%. Economists are divided on how the FOMC will characterize inflation, with a plurality expecting the committee to repeat the lack of recent progress.

“The FOMC may say there is some encouraging data, but we need to see more evidence of a return to confidence,” said Luke Tilley, chief economist at the Wilmington Foundation.

On the second day of next week’s meeting, the government will announce the May consumer price index. While the central bank will focus on a separate measure of prices, CPI is expected to continue to cool inflation.

“The CPI print will influence the FOMC’s tone,” said Stephanie Roth, chief economist at Wolff Research. “We expect a modest print, and a figure below 0.30% could be seen as further evidence of easing inflation.”

Central bankers have been predicting a soft landing for the economy since last July. Economists themselves are increasingly optimistic about the growth outlook. Just 3% of respondents predicted a recession in the next 12 months, down from 58% last July.

While Fed leaders were ambivalent about whether economic readings would trigger a rate cut, 60% of economists said three consecutive positive headline inflation reports would be an important catalyst. Inflation figures from January to March were disappointing, and economists say an equal number of good reports will set the stage for a rate cut.

Beyond that, “clear evidence of slack in the labor market” could prompt a rate cut, said Elisabet Kopelman, US economist at Skandinaviska Enskilda Banken AB.

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The government’s May jobs report, released on Friday, showed a mixed picture of the state of the labor market. While the unemployment rate rose and labor force participation fell, growth in wages and salaries accelerated.

Traders are reading the jobs data as a chance to push back the timing of rate cuts on the net, and expect about 1.5 quarter-point cuts this year, according to futures contracts.

– With assistance from Sarina Yu and Alex Dancy.

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