US Fed Meeting Outcome LIVE Updates: Powell-led FOMC holds key rates steady at 5.25-5.50% for 7th straight meeting

US Fed Chair Powell-led FOMC will now meet on July 30-31 to deliberate for the next set of policy decisions.

-Benchmark interest rates unchanged at 5.25-5.50 per cent, held at 23-year high mark

-Fed to not cut rates until inflation moves sustainably to two per cent target.

-FOMC expects only one rate cut in 2024 and four cuts in 2025 (data dependent)

-Fed raises 2024 inflation forecast, GDP projection held at previous level

-Fed to slow down the pace of balance-sheet runoff starting in June 2024

The S&P 500 and Nasdaq finished at fresh records Wednesday following improved inflation data as the Federal Reserve kept interest rates level. The Dow Jones Industrial Average edged 0.1 per cent lower to 38,712.21.

The broad-based S&P 500 rose 0.9 per cent to 5,421.03, while the tech-rich Nasdaq Composite Index jumped 1.5 per cent to 17,608.44, the third straight closing records for both indices. 

The  US dollar dropped on Wednesday after data showed that consumer prices in May rose less than economists expected, but pared losses after updated interest rate projections by Federal Reserve officials showed an expectation for only one rate cut this year.

The dollar index was last down 0.5 per cent on the day at 104.73, after earlier falling to 104.25. It reached a four-week high of 105.46 on Tuesday. The greenback was also pulled lower as the benchmark 10-year Treasury yield briefly hit its lowest level since April 1 at 4.25 per cent.

 Fed funds future traders are now pricing in a 63 per cent probability of an interest rate cut by September, down from more than 70 per cent earlier on Wednesday, according to CME Group’s FedWatch Tool.

Oil settled higher on Wednesday as ongoing tensions in the Middle East lent support to prices, but news that interest rate cuts could start as late as December capped gains, following the Federal Reserve’s statement concluding its two-day meeting.

Brent crude futures settled 68 cents, or 0.83 per cent, higher at $82.60 a barrel, with US West Texas Intermediate (WTI) crude futures up 60 cents, or 0.77 per cent, to $78.50. Prices had eased more than two per cent last week after OPEC and its allies said they would phase out output cuts starting from October.

Gold prices pared gains on Wednesday after the US Federal Reserve said it sees only one interest rate cut this year, citing still elevated levels of inflation.

Spot gold climbed 0.3 per cent to $2,322.46 per ounce, after rising as much as one per cent earlier in the day, supported by a surprisingly soft US consumer inflation report.

US gold futures for August delivery settled 1.2 per cent higher at $2,354.8. Fed chair Jerome Powell said the inflation outlook offered by the Fed is “a fairly conservative forecast” that may not be borne out by coming data, and is subject to revision.

Stocks hit fresh all-time highs as the Federal Reserve did little to alter Wall Street’s bets that interest rates will drop at least twice this year — even after the central bank’s more conservative outlook.

The S&P 500 topped 5,400 for the first time, with Wednesday marking the 20-month anniversary of the bull-market. Treasuries pared gains, with two-year yields down about eight basis points to 4.75 per cent after sliding to as low as 4.67 per cent earlier. Fed swaps continued to fully price in quarter-point rate cuts in November and December.

Fed officials penciled in just one interest-rate cut this year and they now see four cuts in 2025. In the run-up to the Fed decision, data showed the core consumer price index cooled to the slowest pace in more than three years.

“The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective,” Chair Jerome Powell said Wednesday following the conclusion of a two-day meeting in Washington. “We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward two per cent.

Individual officials’ views on the best path forward for borrowing costs, however, differed. The Fed’s “dot plot” showed four policymakers saw no cuts this year, while seven anticipated just one reduction and eight expected two cuts.

“The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective,” Chair Jerome Powell said Wednesday following the conclusion of a two-day meeting in Washington.

Federal Reserve Chairman Jerome Powell said Wednesday that a single quarter-percentage-point rate cut by itself wouldn’t have a big impact on the U.S. economy, with the path of policy being the more important focus.

“If you look back in five or 10 years and try to pull out the significance to the U.S. economy of one 25-basis-point rate cut, you’d have quite a job on your hands,” Powell said in a press conference following the release of the Fed’s policy statement. But he said that the start of cuts, when it happens, is important. The start of monetary policy easing would be “a consequential decision for the economy” that “you want to get right,” he said.

The Fed also said it would continue to shrink its balance sheet at the slower pace announced in May. Starting this month, the central bank will let its holdings of Treasury securities fall by up to $25 billion a month, down from the previous cap of $60 billion. The cap for mortgage-backed securities was left unchanged at $35 billion.

The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening. It gradually increased the combined amount of Treasury and mortgage bonds it allowed to run off without being reinvested to a total of $95 billion per month.

As part of the updated quarterly forecasts, Fed’s policymakers projected that the economy will grow 2.1 per cent this year and two per cent in 2025, the same as they had envisioned in March. They expect core inflation to be 2.8 per cent by year’s end, according to their preferred gauge, up from a previous forecast of 2.6 per cent. 

They project that unemployment will stay at its current four per cent rate by the end of this year and edge up to 4.2 per cent by the end of 2025. The expectation that the unemployment rate will remain around those low levels indicates that the Fed thinks that while the job market will gradually slow, it will remain healthy.

The US Federal Reserve will need to see more positive data including “good inflation readings” before it feels confident enough to lower interest rates, Fed Chair Jerome Powell said Wednesday.

While the central bank is prepared to hold rates at high levels to rein in inflation, Powell noted: “If the labor market were to weaken unexpectedly or if inflation were to fall more quickly than anticipated, we’re prepared to respond.”

The markdown in the outlook for rate cuts, from three quarter-percentage-point reductions seen in the Fed’s March projections, occurred despite the central bank’s acknowledgement in its new policy statement of “modest further progress” towards its two per cent inflation target – an upgrade from its May 1 statement. It likely removes the possibility of a rate cut before the November 5 US presidential election. 

The move also coincided with an increase to 2.8 per cent in the estimated long-run, or “neutral,” rate of interest from 2.6 per cent, which indicates policymakers have concluded the economy needs more restraint to finish the battle against rising prices. Recent progress has been slow, and Fed officials now project a slightly higher end-of-year inflation rate of 2.6 per cent compared to the 2.4 per cent anticipated as of March.

The US Federal Reserve is prepared to hold interest rates steady at an elevated level if the economy “remains solid and inflation persists,” Fed Chair Jerome Powell told reporters Wednesday.

“We’re prepared to maintain the current target range for the federal funds rate as long as appropriate,” Powell added at a press briefing, after the central bank announced that rates would remain unchanged for now and signaled only one rate reduction this year.

US Treasury yields fell on Wednesday after an inflation reading came in softer than expected, raising hopes for a rate cut from the Federal Reserve in the coming months, and the central bank kept interest rates at current levels in its latest policy statement.

US consumer prices were unchanged in May, following a 0.3 per cent increase in April. In the 12 months through May, the CPI advanced 3.3 per cent after increasing 3.4 per cent in April.

Yields briefly pared some declines after the Fed held interest rates steady and pushed out the start of rate cuts to perhaps as late as December, with officials projecting only a single quarter-percentage-point reduction for the year.

The Federal Open Market Committee adjusted language in its post-meeting statement released Wednesday, noting there has been “modest further progress toward the committee’s two per cent inflation objective” in recent months. Previously, the statement pointed to a “lack” of further progress.

The change nods to more current data showing that price growth ebbed in April and May. Fed officials have repeatedly said interest rates are likely to stay elevated for longer after price pressures picked up in the first quarter.

By the end of 2025, policymakers anticipate a policy rate of 4.1 per cent, according to the median of their projections released today, implying an additional four quarter-of-a-percentage-point cuts next year.

In March, the last time the Fed released quarterly projections, most US central bankers anticipated at least three 25 basis point rate cuts in each of 2024 and 2025. That would have put the policy rate in the 3.75 per cent-4 per cent range by the end of next year.

A run of stronger-than-expected inflation earlier this year has forced U.S. rate-setters to recalibrate, writing down a slower start to rate cuts in the face of an economy proving more resilient than expected to the braking power of high borrowing costs.

The US Fed said in its statement, ‘’Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 per cent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

‘’The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two per cent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective,” said the FOMC in its statement today

Powell-led FOMC has sustained the key interest rates at the two-decade high-mark that it first reached in July 2023. However, Fed policymakers signaled they now expect to cut rates only once this year, compared to the three reductions forecast in March, according to the median projection. They now see four cuts in 2025, more than the three previously outlined.

The US Fed voted unanimously to maintain its benchmark interest rate between 5.25 and 5.50 per cent, saying in a statement that “modest” progress had been made toward its long-term inflation target of two per cent. 

‘’Markets have reacted positively: S&P futures are up ~1.1 per cent, while the UST2Y and UST10Y are down ~15bps and ~12bps respectively, and the DXY is 0.3 per cent lower. Market pricing for a Sep’24 cut is at 66 per cent (vs 49 per cent yest), while that for December is now at 75 per cent (vs 67 per cent yest)

This is another encouraging print for the Fed ahead of the FOMC decision later today, and boosts the chances of the Fed keeping two cuts on tonight’s dot plot for 2024 , increasing market bets for September cuts.

We have been arguing since early part of this year that the Fed will not cut rates in CY24, with the first cut probably coming sometime in Q1CY25. That said, we are skeptical of the widespread optimism for an immaculate disinflation that opens the door for significant Fed easing cycle,” said Madhavi Arora of Emkay Global. 

‘’A softer May CPI print has renewed market bets that the Fed will begin cutting rates sooner rather than later – with two cuts likely to stay on the dot plot for 2024 post today’s FOMC meet. However, we maintain our long standing view that Fed cuts will be elusive in CY24,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.

Headline CPI was lower than expected at 0.0% m/m, (0.1% est), and was up 3.3% y/y (3.4% est). Core CPI was also softer than forecast (0.2% m/m vs 0.3% est), and was up 3.4% y/y (3.5% est). The annual core inflation rate is the lowest since April 21 Core goods prices were flat (0.0% m/m), while the YoY measure stayed deflationary (-1.7% YoY). The decline was led by new car prices (-0.5% m/m), while used car prices rose 0.6% m/m. Discretionary commodities such as electronics and recreational goods saw falling prices as consumers cut spending

The release of the CPI data came at a critical juncture as the FOMC concludes its two-day policy meeting. The FOMC is widely expected to maintain the key federal funds rate in the range of 5.25 per cent to 5.5 per cent, the highest in over two decades.

However, the latest inflation figures might influence the committee’s rate path predictions for the remainder of 2024, especially as traders eagerly await the updated “dot plot,” which outlines Fed officials’ projections for future rate movements.

In March, the dot plot indicated that most Fed policymakers anticipated two to three rate cuts this year. Wednesday’s softer inflation reading, however, could sway Fed officials to consider more than one rate cut by the end of 2024. The CPI data, a crucial indicator of economic health, is closely monitored by investors and policymakers alike.

And Wednesday’s report indicated that consumers are beginning to get some relief from the price spikes of the past three years. Grocery costs were unchanged, on average, from April to May, after actually falling 0.2 per cent the previous month. Food prices have risen just one per cent over the past 12 months, though they’re still up about 20 per cent from three years ago.

Average gas prices tumbled 3.6 per cent nationally just from April to May, but are 2.2 per cent higher than they were a year earlier. Those declines have continued, with gas averaging $3.45 a gallon Wednesday, down 17 cents from a month ago. Americans didn’t drive as much over the Memorial Day weekend as they have in previous years, reducing demand, and oil prices have fallen.

US jobs report highlights a super hot US economy, underscoring that there is a real risk that interest rates won’t be cut until 2025. This is the warning from Nigel Green, the chief executive of deVere Group, one of the world’s largest independent financial advisory and asset management organization as the economy added 272,000 jobs in May, much more than expected.

​Wall Street had forecast an increase of around 185,000 jobs. He comments: “The latest jobs report demonstrates that the labor market, which has been helping fuel inflationary pressures, is still remarkably robust. Even hourly pay is up.

​“This all makes it harder for the Fed to even consider cutting interest rates as the economy remains super hot.” The deVere CEO continues: “This data is still not enough evidence for the cautious Fed Chair Jay Powell and his policymakers to move to cut rates.

​“Inflation appears to be stuck in a range and there will need to be several consecutive months of undeniable proof that it is finally moving down at a clip, rather than a crawl, before any action is taken. This is simply not happening at the moment and there’s no reason to suggest it will next month or the month after that.

​

Manish Chowdhury, Head of Research, StoxBox:

‘’We expect the Federal Reserve to keep its key interest rate unchanged at 5.25 per cent to 5.5 per cent at the end of the two-day policy meeting on Wednesday, with any change in monetary policy outcome still being driven by incoming economic data. Markets would closely watch for any signs on the timing of an interest rate cut going ahead. 

With the inflation trajectory still not striking chord with the Fed officials and labour market not showing signs of sustained weakness, we believe that the tone of the Fed Chairman is unlikely to change in this FOMC meeting. 

Our sense is that the CPI reading for May which would prelude the Fed outcome on Wednesday would set the tone if the chatter surrounding a rate cut in September is off the table or not. We would closely watch the FOMC’s Summary of Economic Projections for gaining more insights into the Fed’s patient view of holding rates higher for longer.”

A repricing wave in the leveraged loan market is helping risky companies cope with the “higher for longer” message from the Federal Reserve. Borrowers reworking debt to obtain better terms have saved more than $1.4 billion in annual interest expenses so far this year, according to Bloomberg calculations.

Investors that have cash to put to work and are facing a short supply of new issues have snapped up the deals, producing an average margin reduction of about 50 basis points. Delays in Fed rate cuts have left companies saddled with the fallout from the jump in benchmark borrowing costs over the previous two years. 

Policymakers meeting today may prolong the agony, with Bloomberg Economics expecting officials’ projections to indicate two 25-basis-point cuts this year, down from three in March. But with demand for risky credit looking set to continue, companies with ratings below investment grade may yet have scope to keep fighting back against the Fed by repricing their loans.

European shares advanced on Wednesday, with rate-sensitive sectors like real-estate jumping after a cool US inflation reading propped up hopes that the Federal Reserve could kick-off its policy easing cycle soon.

The pan-European STOXX 600 closed 1.2 per cent higher after falling for the last three sessions, its biggest single-day percentage jump since January. Global sentiment remained upbeat after data showed U.S. consumer prices were unexpectedly unchanged in May, while underlying inflation pressures abated last month.

Traders boosted bets that the Fed will cut interest rates by September following the data. Rate-sensitive real estate led gains amongst major STOXX 600 sectors with a 2.7 per cent jump, while technology added 2.4 per cent.

London stocks rebounded on Wednesday on revived hopes of interest rate cuts in the near future after data showed cooling inflation in the U.S. and a slowing economy in Britain, while Rentokil Initial further added to the gains.

The blue-chip FTSE 100 closed 0.8 per cent higher in its best day in over a month, while the mid-cap FTSE 250 was up 1.1 per cent, snapping a three session losing streak.

A key US government report showed consumer prices did not rise at all in May, with traders adding to bets of an interest rate cut in September by the Federal Reserve.

The benchmark US S&P 500 rose over one per cent, while the tech-heavy Nasdaq Composite Index hit a record high after the data. Meanwhile, British data showed that economic output was flat in April and the rebound in the economy came to a halt.

The FOMC’Srate-setting panel ended its third policy-setting meeting of the year on May 1 and unanimously voted to hold the policy rate at the 23-year high mark, and said ‘’there has been a lack of further progress toward the Committee’s two per cent inflation objective.”

-Benchmark interest rates were kept unchanged at 5.25-5.50 per cent, held at 23-year high mark

-Fed decided to not cut rates until inflation move sustainably to two per cent target.

-Lack of further progress on inflation, economic outlook uncertain, said US Fed

-Fed decided to slow down pace of balance-sheet runoff starting in June

Gold prices rose one per cent on Wednesday following a surprisingly soft US consumer inflation report, which fueled hopes for an interest rate cut in 2024. Investors are also anticipating the release of the Federal Reserve’s latest policy statement and economic projections.

Spot gold increased by one per cent to $2,338.59 per ounce, while US gold futures climbed 1.2 per cent to $2,335.50. The headline consumer price index remained flat on a month-on-month basis in May, below the expected 0.1 per cent gain. Core prices rose by 0.2 per cent, also falling short of economists’ projections of a 0.3 per cent increase.

Investors have flocked to the precious metal, driven by expectations of monetary easing, geopolitical tensions in Europe and the Middle East, and significant central bank purchases, particularly by China. Spot gold is currently trading around $2,300 per ounce after reaching a record high of $2,449.89 on May 20, marking a gain of more than 11 per cent so far this year.

Bitcoin halted a two-day slide with renewed expectations for US interest rate cuts fueling demand for riskier assets. The largest cryptocurrency gained as much as 3.5 per cent to $69,642 as signs that inflation is cooling bolstered bets the Federal Reserve will cut rates this year. Smaller cryptocurrencies such as Ether, Solana and Dogecoin also rallied.

Shares of crypto-related companies also gained. Crypto exchange Coinbase Global Inc. jumped as much as six per cent, while Bitcoin proxy MicroStrategy Inc. increased as much as 6.9 per cent.

Bitcoin hit a record of $73,798 in mid-March, lifted by inflows into dedicated US exchange-traded funds. But it struggled for new highs in the past three months amid shifting rate expectations.

The so-called core consumer price index — which excludes food and energy costs — climbed 0.2 per cent from April, Bureau of Labor Statistics figures showed. The year-over-year measure rose 3.4 per cent, cooling to the slowest pace in more than three years, according to data out Wednesday.

The policy-setting FOMC is widely expected to hold its benchmark rate steady for a seventh consecutive meeting Wednesday as it awaits more evidence that inflation is still moving down toward its two per cent target. 

“Crypto is a mature asset class now, and similar to broader markets, we should expect upticks when indicators like the CPI suggest interest rates cuts may occur in the not so distant future,” said Michael Safai, co-founder of quantitative trading firm Dexterity Capital.

Indian stock market benchmarks closed in positive territory on Wednesday, June 12, primarily driven by favourable global cues. Most major European and Asian markets rose today, fueled by optimism that the US inflation data will show signs of easing and that Federal Reserve Chair Jerome Powell will provide insight into when rate cuts may begin in the US.

Sensex opened at 76,679.11 against its previous close of 76,456.59 and rose as much as 594 points to its intraday high of 77,050.53, missing its all-time high level of 77,079.04 by just 29 points which it hit on Monday, June 10. The index closed 150 points, or 0.20 per cent, at 76,606.57, with 19 stocks in the green.

Nifty 50 opened at 23,344.45 against its previous close of 23,264.85 and hit its fresh all-time high of 23,441.95 during the session. The index closed 58 points, or 0.25 per cent, higher at 23,322.95, with 32 stocks in the green and 18 in the red.

The overall market capitalisation of companies listed on the BSE increased to nearly ₹429.3 lakh crore from approximately ₹427 lakh crore in the previous session, making investors over ₹2 lakh crore richer in a single day.

‘’Nifty is witnessing consolidation for past three days in absence of fresh domestic trigger while cautiously awaiting US Fed policy outcome. While status quo is expected to be maintained, commentary will be keenly eyed with hint of rate cut in November meeting. Market is likely to consodiate in near term with positive bias,” said Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd.

Last week, the Eurozone and Canada both opted to cut their rates, and Mexico has also initiated rate reductions. “This divergence in monetary policy presents a complex landscape for investors,” notes deVere CEO Nigen Green.

“As the US central bank maintains a tighter stance, global markets are experiencing varying degrees of monetary easing. For investors, this scenario necessitates a reassessment of strategies and portfolios.”

With the Fed’s rates remaining high, sectors such as real estate and utilities, which are sensitive to interest rates, may face headwinds. On the other hand, financials might benefit from higher rates due to increased margins on lending.

As other central banks cut rates, opportunities may arise in international markets. For instance, the Eurozone and Canadian markets could become more attractive as their monetary policies become more accommodative.

Divergent monetary policies also typically lead to currency volatility. Investors should be mindful of potential impacts on their international investments and consider strategies such as currency hedging to mitigate risks.

The future path of Fed policy will be heavily influenced by upcoming economic data. Investors should keep a close eye on reports related to employment, inflation, and GDP growth to anticipate potential shifts in the Fed’s stance.

Nigel Green concludes: “The Fed is almost certainly going to keep rates steady amid easing inflation which signals a cautious approach, prioritizing long-term economic stability over short-term market reactions.

“This stance contrasts with recent rate cuts by other central banks, highlighting a global divergence in monetary policy. “For investors, this new environment requires careful consideration of interest rate impacts, global opportunities, currency risks, and inflation protection.”

Traders ramped up expectations for the pace of Federal Reserve interest-rate cuts this year after cooler-than-expected inflation data, with the bond market seeing the potential for a reduction as early as September.

The shift unleashed steep gains for bonds, with two-year Treasury yields falling as much as 17 basis points to 4.67 per cent, the biggest drop since the December 13 Fed policy meeting. Still ahead Wednesday is the conclusion of the Fed’s June meeting, including revised forecasts for interest rates.

Swap contracts that predict decisions by the US central bank repriced, fully factoring in rate reductions in November and December — and increasing odds of a September cut to about 70 per cent. The rally in US Treasuries spread to Europe, lifting government bonds that had sold off sharply this week after French President Emmanuel Macron shocked investors by calling a snap election.

Euro zone government bond yields dropped after cooler than expected US inflation prompted markets to increase bets the Federal Reserve could cut interest rates as soon as September.

US consumer prices were unexpectedly unchanged in May month on month, and 3.3 per cent higher year on year, both below analysts’ expectations, leading markets to price in a roughly 70 per cent chance of a Fed rate cut by September.

This pricing could be challenged, or underscored, by Fed chair Jerome Powell’s press conference later on Wednesday, following the central bank’s interest rate announcement.

The Fed is widely expected to hold interest rates while publishing new economic projections likely showing fewer rate cuts this year than the three projected in March.

Germany’s 10-year government bond yield, the benchmark for the euro area, was last down 8 basis points at 2.54 per cent, on track for its biggest daily drop since May 15. Italy’s 10 year yield dropped 13 basis points to 3.93 per cent.

Even though the European Central Bank cut rates by 25 basis points last week, investors think its scope for substantial rate cuts while the Fed stays on hold is limited, so European assets are responsive to US data.

The overall CPI was flat in May compared with April, the first time in almost two years that it didn’t climb — thanks in part to a drop in gasoline prices on the month. The core index, which excludes food and energy, rose 0.2 per cent, the least since last October – undershooting all but 12 of the 71 forecasts in Bloomberg’s survey.

Services were the main reason why core inflation came in less than forecast, helped by a decline in car insurance after the biggest run-up in prices in that category since the 1970s. Airline fares were also down. The so-called supercore services gauge, which excludes housing, dropped by 0.04 per cent, the first decline since 2021 and boding well for the Fed’s preferred inflation gauge, the PCE, which is out later this month.

The annual rate of core inflation came down to 3.4 per cent, the lowest since April 2021, aided by the smallest increase in housing costs in more than two years. Headline CPI came in at 3.3 per cent.

The release boosted the likelihood of Fed policymakers projecting two rate cuts for 2024 when they release their updated forecasts later on Wednesday, said economists. Interest-rate futures showed increased bets on the Fed kicking off rate cuts in September.

Fed chair Jerome Powell has insisted in past public comments that the FOMC will remain “data-dependent” in its decision-making and will not be swayed by politics. A September start to rate cuts would almost certainly thrust the Fed into the middle of a fractious presidential campaign between Biden and his likely Republican opponent, Donald Trump.

“The June FOMC meeting will be one of the most pivotal events this year as Federal Reserve Chair Jerome Powell may provide the clearest hint about the rate-cut timetable. The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version,” said Amit Goel, Co-Founder & Chief Global Strategist at Pace 360.

Here are the five crucial factors that will influence the Fed’s policy decision on Wednesday:

1. Tight jobs market
2. Growth indicators
3. Inflation trend
4. Geopolitical scenario
5. Market mood

The S&P 500 and the Nasdaq jumped to record highs on Wednesday after softer inflation data lifted hopes for a rate cut by the Federal Reserve, while Apple overtook Microsoft as the world’s most valuable company.

Apple’s shares climbed 3.7 per cent to hit a record high and dethrone Microsoft for the first time in five months, with the iPhone maker’s market valuation rising to $3.24 trillion versus Microsoft’s $3.23 trillion. The latest spurt came soon after Apple launched its artificial intelligence-integrated products on Monday, when it sprinted past AI chip powerhouse Nvidia’s $3 trillion valuation.

Markets boosted expectations for a September start to rate cuts after the data, pricing in an over 70 per cent chance, according to the CME’s FedWatch tool, from 54 per cent prior to the report.

“It certainly seems as if the trend in inflation continues to be our friend, working its way lower and taking the Street by surprise… that is going to end up working in favor of the Fed,” said Sam Stovall, chief investment strategist at CFRA Research.

US Federal Reserve Chair Jerome Powell said on Tuesday, May 14, that he expects US inflation to resume declining through 2024 as it did last year, however, his confidence on lower inflation has lately dropped with the quick rise in prices during the first quarter. Powell says it will likely take more time than previously thought to attain confidence needed to lower the key interest rates.

During the event hosted by the Foreign Bankers’ Association in Amsterdam, Powell said, “I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year.” “I would say my confidence in that is not as high as it was,” added the Fed chief.

Still, Powell said he felt it unlikely that the Fed would raise interest rates again, restating as he did after the Fed’s last meeting that the central bank will be “patient” and allow the current policy rate to have its full impact. “I don’t think that it is likely based on the data we have that the next move that we make will be a rate hike,” Powell said. “It is more likely … we hold the policy rate where it is.”

“We did not expect this to be a smooth road,” Powell said. The Fed chief also described the monetary current policy as restrictive by “many, many measures” but noted that only time will tell whether interest rates are sufficiently high to bring inflation back to the central bank’s two per cent goal.

The US economy remains strong, defying recession forecasts. This indicates that the US economy is well-placed to grow at a healthy pace this year.

On Tuesday, the World Bank raised its 2024 global growth outlook due to the strong US economy.

According to a Reuters report, the World Bank expects the global economy to stabilise at 2.6 per cent in 2024, unchanged from 2023, and up 0.2 percentage point from the World Bank’s January forecast.

The World Bank is now forecasting 2.5 per cent US growth for 2024 – matching the 2023 pace – and up sharply from the January forecast of 1.6 per cent.

Strong growth indicators indicate the Fed may keep rates higher for a longer period unless it is convinced that elevated interest rates exert significant pressure on the economy.

The Fed will keep in mind that the Russia-Ukraine war and conflict in West Asia persist. Any escalation of tension in the West Ais region will potentially shoot up crude oil prices, dealing a blow to the fight against inflation.

The Federal Reserve will almost certainly hold US interest rates steady at the current 23-year high on Wednesday and investors need to review their portfolios amid a divergence in global monetary policy.

This is the message from Nigel Green, the CEO of deVere Group, one of the world’s largest independent financial advisory and asset management organisations, as the latest Consumer Price Index (CPI) report shows no increase in inflation for May, a sign that inflation may be easing its grip on the US economy.

He comments: “With the annual CPI increase at 3.3 per cent, markets might be hopeful for potentially more rate cuts, but there remains a real risk that the Fed’s cautious approach means that such a move may not come until 2025.

“The Labor Department’s CPI report, a key gauge of inflation that tracks the cost of a broad basket of goods and services, remained flat from the previous month.

“This lighter-than-expected inflation data has led some market participants to price in the possibility of rate cuts. “However, one positive data point is not enough for the US central bank to change course.

Federal Reserve officials cite the robust labor market as a significant factor in their decision to maintain the current rate. The strength of the job market provides the Fed with the flexibility to keep rates elevated, contrasting sharply with recent actions by other major central banks.

Wall Street stocks jumped early Wednesday after US data showed lower inflation in May ahead of a Federal Reserve interest rate decision later in the day. The annual consumer price index came in at 3.3 per cent in May, down 0.1 percentage point from April, the Labor Department said in a statement — slightly below expectations.

While the Fed is widely expected to keep interest rates unchanged at Wednesday’s meeting, the figures could keep the US central bank on track for rate cuts later in 2024.

About 10 minutes into trading, the Dow Jones Industrial Average was up 0.7 per cent at 39,028.46. The broad-based S&P 500 gained 0.9 per cent to 5,421.87, while the tech-rich Nasdaq Composite Index advanced 1.2 per cent to 17,557.33

US consumer prices were unexpectedly unchanged in May amid cheaper gasoline, but inflation likely remains too high for the Federal Reserve to start cutting interest rates before September against the backdrop of a persistently strong labor market.

The unchanged reading in the consumer price index reported by the Labor Department’s Bureau of Labor Statistics on Wednesday followed a 0.3 per cent increase in April. In the 12 months through May, the CPI advanced 3.3 per cent after increasing 3.4 per cent in April. 

The Bureau of Labor Statistics reported last week that the US non-farm payrolls increased by 272,000 for the month, considerably higher than the Wall Street consensus of 190,000 and well above April’s comparatively muted gain of 165,000. In addition, average hourly earnings rose 4.1 per cent over the past 12 months, more than expected.

With labour supply dropping, average hourly earnings grew, rising by 0.4 per cent month-on-month (MoM) in May from 0.2 per cent in April. Overall, the robust pace of hiring will likely compel chair Jerome Powell-led FOMC to retain its guidance of keeping rates elevated and maintaining status quo in the policy meeting, according to ICICI Bank.

‘’We expect the restrictive monetary policy regime to work to cool the labour market. The downward revisions in the previous two months shows that on a trend basis hiring is slowing that should likely become gradually more pronounced over the remainder of the year. While we maintain our expectations for a September cut, the odds have reduced and it remains contingent on the evolution of data,” said economists at ICICI Bank.

Crude oil prices ticked higher on Wednesday after three key forecasters predicted that global oil inventories would fall in the second half of 2024, boosting prices ahead of the US Fed policy outcome.

Brent crude futures were up 88 cents, or about 1.1 per cent, to $82.80 a barrel, while US West Texas Intermediate (WTI) crude futures were up 96 cents, or roughly 1.2 per cent, to $78.86. Both contracts rose by $1 or more earlier in the session.

US inflation rose less-than-expected in April 2024, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to Wall Street expectations for a September interest rate cut by the US Federal Reserve. The US CPI rose 0.3 per cent sequentially. In the 12 months through April, the CPI increased 3.4 per cent year-on-year, which follows a 3.5 per cent rise in March 2024. The annual increase in consumer prices has dropped from a peak of 9.1 per cent in June 2022, however the progress has since slowed.

Justin Khoo, Senior Market Analyst, APAC – VT Markets:

“Last Friday, the Bureau of Labor Statistics reported that the US non-farm payrolls increased by 272,000 for the month, considerably higher than the Wall Street consensus of 190,000 and well above April’s comparatively muted gain of 165,000.

In addition, average hourly earnings rose 4.1 per cent over the past 12 months, more than expected.

Beyond signaling a still-vibrant labor market, the data at the very least adds to the narrative that the Fed doesn’t have to rush to lower interest rates. As such, futures traders cut bets on rate cuts which meant a stronger US dollar for now.

Pricing in Fed funds futures pointed to almost no chance of a reduction at either the Federal Open Market Committee’s meeting on Wednesday or on July 30-31. From there, pricing indicates about a 50-50 chance of a September move, and only about a 43 per cent probability that the Fed will follow up with a second cut before the end of the year”

The US consumer price index-based (CPI) data will be released today ahead of the FOMC decision. Analysts and policymakers will look out for the inflation data which will likely impact the central bank’s interest rate decision later today. US Fed is widely expected to maintain the status quo on key rates.