FOMC Decision Looms as Inflation Cools, Uncertainty Soars
- The Fed is expected to hold interest rates steady this week.
- With inflation continuing to ease, speculation is growing that the central bank could soon pivot.
The Federal Reserve is widely expected to hold interest rates steady at its policy meeting this Wednesday, but investors are watching closely for any signals about when rate cuts could begin.
As of Friday afternoon, futures markets were assigning a 99.7% probability that the Fed will keep its benchmark federal funds rate unchanged at 4.25% to 4.5%, where it’s been since December. That would mark the fourth consecutive meeting without a change.
But with inflation continuing to ease, speculation is growing that the Fed could soon pivot toward cutting rates, possibly as early as this fall.
CPI Cools Off
Last week’s Consumer Price Index report showed that core inflation rose just 0.1% in May, less than the 0.3% economists expected. On a year-over-year basis, core CPI is up 2.8%, still above the Fed’s 2% target but continuing its downward trend.
Despite the encouraging inflation data, the Fed is likely to remain cautious in the near term. Economic growth remains resilient, and the outlook is clouded by a number of uncertainties, including President Donald Trump’s trade and immigration policies and a surprise escalation in Middle East tensions.
Crude oil prices surged last week after Israel launched a surprise attack on Iran, raising concerns about a potential inflationary shock if the conflict deepens.
At the same time, political pressure is mounting. President Trump has publicly criticized the Fed and called for a 100-basis-point (1%) rate cut. But the market isn’t expecting anything close to that. Fed funds futures suggest the first cut, likely 25 basis points, won’t come until September. Traders are pricing in about 100 basis points of cuts over the 12 months that follow.
Whether the Fed moves sooner or later will depend on how the data unfold and how policymakers weigh the tradeoffs between inflation and growth.
All eyes will be on Fed Chair Jerome Powell at 2 p.m. EDT on Wednesday for clues about how the central bank is navigating those risks and how close it may be to cutting rates.
