Federal Reserve Meeting Preview: no hope for rate cuts anytime soon

Markets expect rates to be kept unchanged at the upcoming Federal Open Market Committee meeting on 1 May. Data from Refinitiv shows a 97% chance that the Federal Reserve will keep rates at the current range of 5.25 - 5.5% as stronger economic data has weakened the Fed’s ability to loosen monetary policy.

Markets seem to have become accustomed to the fact that the return to the 2% inflation target won’t be an easy or quick process. The strength in the underlying economy has helped, with the latest growth data showing GDP rose 1.6% in the first quarter of 2024, following very strong growth in the third and fourth quarters of 2023. This reflects the fact that the Fed has been successful in achieving a soft landing, balancing controlling inflation with avoiding a recession. However, even FOMC members have had to admit that inflation has been ‘stickier’ than anticipated, making the process of adapting monetary policy harder and riskier. 

This has led to markets continuously pushing back expectations for when rate cuts will take place. At the beginning of the year, there were 150 basis points (bps) of cuts priced in for 2024, which meant up to six rate cuts starting from March. The current pricing shows just 34bps of cuts, meaning there’s only one cut fully priced in and it’s not expected to happen until at least November. These expectations are constantly changing as the latest information becomes available, and markets will continue to keep a close eye on how the data evolves. Regarding the FOMC meeting, the commentary will likely be scrutinised to try and figure out any more information on when the first rate cut will be, although it’s highly unlikely that Jerome Powell and his team will be able to disclose that information – mostly because they likely don’t know themselves.

Powell has shown a desire to start cutting in the past, but the residual strength in the labour market and inflationary pressures have been holding him back. The May meeting won’t include any update to the Summary of Economic Projections since those forecasts are only adjusted at every other meeting. This means the information provided may be limited and could cause a subdued market reaction if things are left unchanged as expected. That is, of course, if Powell and his team don’t provide any changes to their guidance in their commentary.

The US dollar has lost some of its recent strength in the past few weeks as the tensions in the Middle East mildly de-escalate. Tehran’s lack of retaliation after Israel’s latest attack on Iran has seemed to reduce some fear in the markets, leading safe havens like gold and the dollar to pare back some of the gains. That said, the continued strength in the US data has been widening the rate differential of the US dollar against other major currencies as the Federal Reserve is seen to be the least likely to cut rates in the short term. This has kept USD supported and is likely to continue doing so in the absence of any material change in the economic data.

US Dollar Index (DXY) daily chart

Past performance is not a reliable indicator of future results.

Meanwhile, the risk-off mood stemming from geopolitical concerns has weighed on equities, but the momentum has started to turn higher once again. The fact that most major equity indices were heavily overbought helped the pullback as it turned into a technical correction as many saw the opportunity to take profits. But the Relative Strength Index (RSI) is now back to moving higher as buyers come in at more attractive levels following the retracement. The bias continues to point higher in US equities, but traders should be aware of the latest economic and political developments as the momentum can reverse quickly if markets become risk-averse once again.
 
S&P 500 daily chart

Past performance is not a reliable indicator of future results.