Wednesday's Fed meeting and inflation data might have a significant influence

Key facts

• The critical consumer price index data for May is released in the morning, and the Fed's policy meeting is held in the afternoon, making Wednesday a news-filled day.
• The CPI is only expected to grow by 0.1% from April, according to economists, but that would still translate into a 3.4% annual gain. Core PCI is anticipated to grow at a 3.5% yearly rate and a 0.3% monthly rate.
• The Federal Reserve will take no action with regard to interest rates. Officials will, however, provide a range of economic forecasting updates, including the much-discussed "dot plot" of expected interest rates from the central bank.

Investors will be hearing about the direction of inflation and the Federal Reserve's intended response on Wednesday, which is positioned to be one of the most significant days of the year for economic news.

A pair of crucial signals regarding the path of the economy and whether policymakers can soon take their foot off the brake will be transmitted in the morning with the release of the crucial consumer price index reading for May and in the afternoon with the Fed's policy meeting.

The day, according to UBS analyst Jonathan Pingle, "packs months of macro risk into one day.”

Pingle, like many others on Wall Street, believes that the Fed will adjust its projections for inflation, economic growth, and interest rates as a result of the CPI report, last Friday's unexpectedly good nonfarm payrolls reading, and other recent data releases.

Those who are optimistic hope that the actions mostly stay within the range of anticipated results and don't further agitate the already tense market players.

Lead portfolio strategist at Natixis Investment Managers Jack Janasiewicz stated, "While both have historically proven to be market-moving events, we expect very little fireworks from both releases given our expectations for rather benign outcomes."

Here are the expected outcomes of both occurrences, in broad strokes.

Inflation in the CPI

It is anticipated that the price index for a wide range of products and services will barely change from month to month in May, rising by 0.1% from April to May but still representing a 3.4% annual increase overall.

The so-called core PCI, which does not include food and energy prices, is expected to increase at a rate of 3.5% annually and 0.3% monthly.

All those figures indicate that inflation is still substantially above the Federal Reserve's goal rate of 2%, and none of them deviate much from the readings from April. However, a closer examination of a number of key indicators, such as insurance premiums and core services that do not include housing, according to some analysts, would demonstrate that inflation is, at the very least, gradually increasing.

A crucial aspect regarding the CPI is that, despite its widespread attention from the investing community and the general public, the Fed does not utilize it as its primary indicator. The Commerce Department's measure of personal consumption expenditure prices, which takes consumer behavior changes into account and is more comprehensive, is preferred by central bankers.

The CPI report is expected to be released by the Bureau of Labor Statistics on Wednesday at 8:30 a.m. ET.

The Fed meeting

The members of the Federal Open Market Committee, who set interest rates, will be completing their estimates for inflation, the GDP, and unemployment as well as stating the anticipated rate path through 2026 and beyond, while the BLS is releasing the CPI report.

First and foremost, the Federal Reserve will take no action at all on interest rates. With the central bank maintaining its benchmark overnight borrowing rate in a band between 5.25% and 5.50%, there is essentially no prospect of an interest rate change in any direction, according to both market pricing and policymakers' language.

Officials will instead take additional measures that the markets will be keenly monitoring.

The CPI data may have an impact on the quarterly changes to the Summary of Economic Projections that FOMC members provide. The 19 conference participants are typically given a little extra time to account for incoming data, even though they typically submit their estimates early on Wednesday.

There is a loose agreement in market commentary that the Fed will move the crucial "dot plot" in an upward direction. As a result, the grid is expected to suggest fewer interest rate reductions than the three that were projected for 2024 in March. Most economists anticipate two reductions, but there is considerable concern that the prognosis may drop to just one.

According to UBS' Pingle, if the Fed signals one cut, it probably won't take action until November or December.

The first rate drop is anticipated by Goldman Sachs experts for September. Others, however, have different opinions. Citigroup is searching for a potential three, while Bank of America is asking for just one, even though it believes the dot plot will show two.

Economist David Mericle of Goldman Sachs stated, "Our conviction remains limited because we continue to see cuts as optional, the inflation news we expect would make a decision to cut reasonable but not obvious, and FOMC participants have a range of views.”

Additionally, economists anticipate that the Fed will hike projected inflation from March's predictions and lower its outlook for growth in the gross domestic product.

The post-meeting statement and Chair Jerome Powell's news conference are two more noteworthy Fed events.

"We do not anticipate that the June meeting's FOMC statement or Chair Powell's remarks will undergo any notable modifications. Powell's resistance to potential rate hikes was the main takeaway from his most recent press conference in May, but Mericle noted that since then, market speculation about hikes has subsided.

In fact, very few Fed officials have raised the prospect of more rate hikes in their remarks to the public.

However, compared to earlier in 2024, when traders anticipated six cuts this year, the market has had to drastically reprize its expectations.

Higher rates for longer periods of time are being viewed as a much greater potential in the changing economy, which is supported by recent economic data and is expected to be further supported by Wednesday's CPI report. For example, salaries grew at a 4.1% annual clip in the payrolls report released on Friday, significantly faster than the Fed's desired rate.

Nicholas Colas, co-founder of DataTrek Research, observed, "A still-growing U.S. economy is keeping wage growth stubbornly above the Fed's unofficial target of 3.3 percent." "It is difficult to see a pathway to anything more than a token Fed rate cut in 2024 unless economic growth cools.”