By Howard Schneider
WASHINGTON (Reuters) – Federal Reserve officials will wrap up their final two-day policy meeting on Wednesday with a new statement and comments from Federal Reserve Chair Jerome Powell that could provide a clearer sense of how recent disappointing inflation readings are changing interest rate expectations have interest rate cuts this year.
The Fed will almost certainly keep its federal funds rate stable because investors have a near 100 percent probability of that outcome and have no support for any rate changes offered by officials ahead of the meeting.
But a new policy statement released at 2 p.m. EDT (1800 GMT) and Powell’s news conference a half-hour later should shed light on how much – if at all – a period of three lost months in the inflation fight increases the likelihood that borrowing costs will rise , has influenced will fall soon.
Fed policymakers will not update their quarterly economic forecasts at this week’s meeting, so any new guidance will be based on the statement and Powell’s news conference.
The Fed made significant progress in bringing inflation back to its 2% target after rising to a 40-year high in 2022.
But this year progress has stalled and is even at risk of reversing, pushing central bank officials to play down the start of rate cuts.
As the last Fed meeting began on Tuesday, two pieces of data further clouded the outlook.
The employment cost index (ECI), an important measure of labor market conditions because it is measured quarterly and takes into account changes in the occupational mix, rose 4.2% in the first quarter compared to the fourth quarter increase and above what was seen as the Fed’s inflation target is considered compatible.
Two national measures of home prices also showed unexpected strength, a blow to the Fed’s long-held hopes that protective inflation would ease and help lower headline inflation.
“The recent data was not what the Fed expected,” said Tuan Nguyen, a U.S. economist at RSM, with the ECI in particular potentially leading policymakers to take a more hawkish view of the recent data, which they still hope that they will prove to be a boost to bring down inflation, as opposed to a sign that progress is stalling.
Investors in contracts tied to the Fed’s key interest rate reacted to the data by further increasing their expectations of a possible decline in the federal funds rate, according to data from CME Group’s FedWatch Tool, with an initial one Cut by a quarter of a percentage point at the central bank’s September 17-18 meeting with balanced ratios (as of Tuesday).
The odds of not cutting the key interest rate at all this year from the current range of 5.25% to 5.50% were about one in four – up from almost zero in early April.
The Fed last raised interest rates in July, and while officials have said they are unlikely to be raised again, Powell’s assessment of the issue will be important at his news conference – if only to reinforce that the expectation is to simply leave interest rates. The current key interest rate will be in effect for longer than expected.
“Recent data clearly has not given us greater confidence and instead suggests that it will likely take longer than expected to achieve that confidence” and proceed with rate cuts, Powell said April 16 in his final public comments before the meeting this week. “At the moment, given the strength of the labor market and the progress made so far on inflation, it is appropriate to give restrictive policies even more time to take effect.”
(Reporting by Howard Schneider; Editing by Paul Simao)