Source: Zhitong Finance

The Fed's debate is beginning to shift from how many times to cut interest rates this year to whether to cut interest rates in 2024.

Outsiders generally expect that the Fed's policymakers will keep interest rates high for more than 20 years at the end of Wednesday's meeting, so many will focus on the post-meeting statement and the tone of Federal Reserve Chairman Powell's press conference.

Officials are also expected to announce that the Federal Reserve will slow down the pace of reducing its balance sheet by $7.4 trillion in the near future. This move is independent of any decision on the timing of interest rates. Policymakers have indicated that it is necessary to take a cautious approach to further runoffs, hoping to avoid market turmoil.

The inflation report for the first three months of this year was worse than expected. Powell said that people may need “longer than expected” to be confident that inflation is moving towards the central bank's 2% target. He added that the Federal Reserve can keep interest rates high “for as long as needed.”

Although the Federal Reserve leadership has suggested delaying interest rate cuts, it now seems that the possibility that policymakers may not cut interest rates at all this year is beginning to emerge.

Dean Maki, chief economist at Point72 and former Federal Reserve economist, said: “If inflation data doesn't improve enough, then they will stay the same indefinitely.” “We had a setback in the first quarter, but I don't think the core of the committee sees this as a permanent setback. They still think the road is bumpy.”

Powell's colleagues at the Federal Open Market Committee (FOMC) believe there is no urgency to lower interest rates.

Federal Reserve Governor Bowman said that she believes there is an “upward risk” in inflation, and Minneapolis Federal Reserve Chairman Kashkari proposed the possibility that interest rates will not be cut this year. Meanwhile, Atlanta Federal Reserve Chairman Bostic said he may be inclined to raise interest rates if inflation worsens.

Swap traders currently expect that the Federal Reserve will only cut interest rates once throughout 2024, far lower than the 6 times they expected at the beginning of this year to cut interest rates by 25 basis points. The FOMC will update its interest rate forecast at the June 11-12 meeting.

Federal Reserve officials won't be updating their quarterly interest rate forecasts this week — also known as “bitmaps.” However, the latest inflation data will be the focus of discussion, and the FOMC may adjust the wording in the policy statement after the meeting to reflect people's growing concerns.

Diane Swonk, chief economist at KPMG LLP (KPMG LLP), said: “There is controversy about whether to cut interest rates.” Swonk would like the Commission to consider sending out new information. “The Federal Reserve has no choice but to give up on cutting interest rates.”

According to data released on Friday, the index favored by the Federal Reserve to measure potential inflation in the US rose at a brisk pace in March. This is the third consecutive month of disappointing reports. After experiencing a sharp decline in the second half of 2023, progress in reducing inflation has stalled. According to the Federal Reserve's preferred measurement, the annual inflation rate in March was 2.7%, which is slightly higher after excluding volatile food and energy prices.

Much of this week's FOMC statement will be similar to March; however, the Commission may acknowledge that progress in inflation has weakened in recent months. Powell is likely to repeat his recent remarks. In his speech, he said that since the US economy is still generally strong, he is inclined to give policies more time to work.

Since these data will be compared to a period of rapid easing of price pressure in late 2023, there will be no progress in annual inflation in the second half of this year. Some Wall Street economists say that over time, this may make it more difficult for Federal Reserve officials to justify cutting interest rates.

“Rule of thumb”

However, policymakers can be pleased with continued progress in monthly inflation data. Point72's Maki said that a “good rule of thumb” is that it will take at least three months for inflation data to improve before officials consider cutting interest rates, and discussions may be postponed until September or later.

Although Fed officials emphasized that the Federal Reserve will not consider political influence when making decisions, the first rate cut in September will attract stricter scrutiny before the November presidential election.

Powell has maintained the unity of the committee on the interest rate path. There have been no objections in the past two years, but there are also some signs of tension. Until recently, Powell sounded dovish on interest rates; this week he may adopt a tone more inclined to the need to cut interest rates.

Ellen Meade, a professor at Duke University and former senior adviser to the Federal Reserve Board, said: “We have had a very difficult communication for several months.” “Since the March meeting, we have seen a strong backlash from policy makers against Powell.”

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