Fed outcome expectations: Markets hawk-eyed for any clues on rate easing this year

Fed officials will keep a close watch on May due before the policy announcement to gauge whether the inflation is turning down toward the central bank's target.

In today's outcome, there is near consensus that the Jerome Powell-led will keep the rates unchanged at a target range of 5.25%-5.5%. The policymakers have held interest rates at 5.3% since July last year, after raising them sharply from near zero starting in March 2022.

"We expect the Federal Reserve to keep its key interest rate unchanged at 5.25% to 5.5% 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," said Manish Chowdhury, Head of Research at StoxBox.

After a steady decline of inflation in the second half of last year, the markets anticipated three to four rate cuts this year, with the first of them coming as early as March. However, the central bank dialled down on its stance and stuck to tighter monetary policy, after a surprise uptick in inflation in the first three months of 2024.

Last month, Fed chair said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate. Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought.

With the cuts almost certainly off the agenda for the latest meeting, the anticipation will also be around a set of economic forecasts that the rate-setting panel will release for the first time since March.

Fed commentary

With the inflation trajectory still not striking a chord with the Fed officials and labour market not showing signs of sustained weakness, it is believed that the tone of the Fed Chairman is unlikely to change by not giving any clear signal on rate cuts.

Analysts expect the policymakers to signal, if any, that they will cut their benchmark rate just once or twice by year end, rather than the three times they had envisioned in March.

"Surprising weakness in the next jobs report and May’s robust payroll print doesn’t suggest inflation data alone won’t be enough to spur the Fed to cut rates in July," said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.

"Given the political sensitivity around November’s presidential election, we think the most plausible start date is December. In the dot plot, we expect the median participant to reduce the scope of cuts expected this year from 75 bps to 50 bps," Goel added.

The direction for D-Street

With the election outcome out of the way, Indian markets are trading near all-time highs, and are looking for fresh triggers for a directional move on either side. The tone of the Fed chair Powell and any indication on the rate cuts trajectory this year will have an impact on Indian equities.

"The 32% decline in India VIX during the last 5 days indicates that the days of heightened volatility are over and the market has entered a consolidation phase. From now on the focus will be on fundamentals and news flows," said V K Vijayakumar, Chief Investment Strategist, .

"The Fed may delay or at best pause the rate cut trajectory. That said, post-election stability in ministry allocation only means status quo of policy stability, which is great for markets in general," said Abhishek Banerjee, smallcase Manager and Founder at Lotusdew.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)