US FEDERAL RESERVE DECISION PREVIEW: MARKETS LOOK FOR CLUES ABOUT INTEREST RATE CUT TIMING

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  • The Federal Reserve is widely anticipated to keep interest rates unchanged.
  • Fed Chairman Powell’s remarks could provide important clues about the timing of the policy pivot.
  • Markets see a strong chance that the Fed will wait until September to lower the interest rate.

The US Federal Reserve (Fed) will announce monetary policy decisions following the April 30 - May 1 policy meeting on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the sixth consecutive meeting.

The CME FedWatch Tool shows that markets see little to no chance of a rate cut in June. Hence, investors will scrutinize the changes in the statement language and comments from Fed Chairman Jerome Powell to figure out the timing of the policy pivot. According to the FedWatch Tool, there is a 30% and a 60% probability of the Fed lowering the policy rate in July or in September, respectively.

At the end of 2023, markets were expecting the Fed to cut the policy rate as early as March. Strong employment and growth figures in the first quarter of 2024, accompanied by data showing a lack of progress in disinflation, caused investors to shift their forecasts toward a policy pivot in the second half of the year.

Macroeconomic data releases since the December policy meeting showed that consumer and producer inflation started to edge higher in the first couple of months of the year. Additionally, the labor market remained relatively healthy while activity-related data, such as the forward-looking PMI surveys, suggested that the US is very likely to avoid a recession.

Previewing the Federal Open Market Committee (FOMC) meeting, “the FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50% next week, with Chair Powell likely sounding more cautious than usual, with a hawkish bent, amid firmer than expected inflation data,” said TD Securities analysts. 

"Higher for longer will likely remain the name of the game for now. We also expect the Fed to announce a preliminary plan to taper QT starting in June”, they added

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