Fed meeting and inflation report both hit Wednesday, and the impact could be huge

Wednesday
is
shaping
up
to
be
one
of
the
most
important
days
of
the
year
for
economic
news,
as
investors
will
hear
about
the
path
of

inflation
and
the
manner
in
which
the

Federal
Reserve
plans
to
react.

In
a
one-two
punch
that
starts
in
the
morning
with
the
pivotal
consumer
price
index
reading
for
May
and
ends
with
the
Fed’s
policy
meeting
in
the
afternoon,
vital
signals
will
be
sent
about
the
direction
of
the
economy
and
whether
policymakers
can
soon
take
their
foot
off
the
brake.

The
day
“packs
months
of
macro
risk
into
one
day,”
wrote
UBS
economist
Jonathan
Pingle.

Like
many
others
on
Wall
Street,
Pingle
expects
the

CPI
report,
combined
with
last
Friday’s
surprisingly
strong

nonfarm
payrolls
reading
and
other
recent
data
releases
to
lead
Fed
officials
to
tinker
with
their
outlook
for
inflation,
economic
growth
and
interest
rates.

Optimists
are
hoping
that
the
moves
fall
largely
within
the
realm
of
expected
outcomes
and
don’t
do
much
to
rattle
the
frayed
nerves
of
market
participants.

“While
both
typically
have
proven
to
be
market-moving
events,
we
expect
very
little
fireworks
from
both
releases
given
our
expectations
for
rather
benign
outcomes,”
said
Jack
Janasiewicz,
lead
portfolio
strategist
at
Natixis
Investment
Managers.

In
broad
strokes,
here
are
anticipated
outcomes
of
both
events.

The
measure
of
how
much
a
broad
basket
of
goods
and
services
cost
consumers
in
May
is
expected
to
show
little
month-over-month
movement
—
just
a
0.1%
increase
from
April,
though
that
still
would
equate
to
an
aggregate
annual
rise
of
3.4%.

Excluding
food
and
energy
prices,
the
so-called
core
PCI
is
projected
to
show
a
0.3%
monthly
gain
and
a
3.5%
annual
rate.

None
of
those
numbers
are
dramatically
different
from
the
April
readings,
and
still
show
inflation
running
well
above
the
Fed’s
2%
target.
Still,
some
economists
say
that
a
look
under
the
hood
at
various
important
metrics
such
as
insurance
costs
and
core
services
excluding
housing
will
show
that
inflation
at
least
is
trending
in
the
right
direction,
albeit
incrementally.

“On
the
inflation
front,
expect
more
of
the
same
–
continued
evidence
that
the
broader
disinflationary
trend
is
still
intact
and
that
the
stickier
first
quarter
data
was
simply
a
pause
in
a
downtrend,”
Janasiewicz
said.

One
important
point
about
the
CPI:
while
it
gets
a
lot
of
focus
from
both
the
investing
and
general
public,
it
is
not
the
main
metric
the
Fed
uses.
Central
bankers
prefer
the
Commerce
Department’s
measure
of
personal
consumption
expenditures
prices,
a
broader
measure
that
also
accounts
for
changes
in
consumer
behavior.

The
Bureau
of
Labor
Statistics
is
scheduled
to
release
the
CPI
report
at
8:30
a.m.
ET
on
Wednesday.

While
the
BLS
is
disseminating
the
CPI
report,
the
rate-setting
Federal
Open
Market
Committee
members
will
be
finalizing
their
projections
for
inflation,
gross
domestic
product
and
unemployment
as
well
as
indicating
the
expected
rate
path
through
2026
and
beyond.

First
and
foremost,
when
it
comes
to
interest
rates,
the
Fed
will
do
…
nothing.
Both
market
pricing
and
rhetoric
from
policymakers
point
to
virtually
no
chance
of
a
move
either
way
on
interest
rates,
with
the
central
bank
keeping
its
benchmark
overnight
borrowing
rate
in
a
range
between
5.25%-5.50%.

Instead,
officials
will
take
other
action
that
markets
will
be
watching
closely.

FOMC
members
will
release
quarterly
updates
to
their
Summary
of
Economic
Projections,
which
could
be
influenced
by
the
CPI
report.
While
meeting
participants
usually
submit
their
estimates
early
Wednesday,
the
19
meeting
participants
generally
are
allowed
a
little
extra
time
to
account
for
incoming
data.

The
informal
consensus
in
market
commentary
is
that
the
Fed
will
adjust
the
path
of
its
pivotal
“dot
plot”
upward.
The
impact
of
that
would
mean
the
grid
likely
will
point
to
fewer
than
the
three
interest
rate
cuts
indicated
for
2024
in
March,
toward
a
path
that
most
economists
expect
to
show
two
reductions,
though
there
is
some
worry
the
outlook
could
shrink
to
just
one.

Should
the
Fed
signal
one
cut,
that
likely
means
the
Fed
wouldn’t
act
until
November
or
December,
UBS’
Pingle
said.

Goldman
Sachs
economists
expect
two
rate
cuts,
with
the
first
coming
in
September.
Others
differ,
though,
with
Bank
of
America
calling
for
one
and
Citigroup
looking
for
a
possible
three,
though
it
expects
the
dot
plot
to
indicate
two.

“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,”
wrote
Goldman
economist
David
Mericle.

Economists
also
expect
the
Fed
to
reduce
its
outlook
for
gross
domestic
product
growth
and
raise
the
expected
inflation
level
from
March’s
projections.

Other
significant
Fed
developments
include
the
post-meeting
statement
as
well
as
Chair

Jerome
Powell‘s
news
conference
afterward.

“We
do
not
expect
any
significant
changes
to
the
FOMC
statement
or
Chair
Powell’s
message
at
the
June
meeting.
The
most
notable
theme
of
Powell’s
last
press
conference
in
May
was
his
pushback
against
possible
rate
hikes,
but
talk
of
hikes
has
died
down
in
markets
since
then,”
Mericle
said.

Indeed,
only
a
few
Fed
officials
in
their
public
commentary
have
mentioned
the

possibility
of
raising
rates
further.

However,
the
market
has
had
to
dramatically
reprice
its
expectations
from
earlier
in
2024
when
traders
expected
six
cuts
this
year.

The
recent
economic
data,
likely
to
be
echoed
by
Wednesday’s
CPI
report,
point
to
an
evolving
economy
where
higher
for
longer
on
rates
is
being
treated
as
a
much
greater
possibility.
The
payrolls
report
Friday,
for
instance,
showed
wages
growing
at
a
4.1%
annual
clip,
well
above
what
the
Fed
would
like
to
see.

“A
still-growing
U.S.
economy
is
keeping
wage
growth
stubbornly
above
the
Fed’s
unofficial
target
of
3.3
percent,”
wrote
Nicholas
Colas,
co-founder
of
DataTrek
Research.
“Unless
economic
growth
cools,
it
is
hard
to
see
a
pathway
to
anything
more
than
a
token
Fed
rate
cut
in
2024.”