Here's what to expect when the Federal Reserve concludes its meeting on Wednesday

Facing stubborn inflation that has raised concerns about where policy is heading, the Fed has fallen into a holding pattern that is likely to reverse when it concludes its meeting on Wednesday.

Markets expect the Federal Open Market Committee, the central bank's policy-making arm, to announce any change in interest rates. This will keep the Fed's key overnight borrowing rate in a target range between 5.25%-5.5% for what could take months — or even longer.

Recent comments from policymakers and on Wall Street suggest there is little the committee can do at this point.

“Almost everyone at the FOMC is talking the same script right now,” said Jay Lebas, chief fixed income strategist at Janney Montgomery Scott. “With one or two exceptions, policymakers generally agree that inflation data in the past few months has been too warm to warrant near-term action. But they remain hopeful that they will be in a position to cut interest rates later.” .

The only news likely to come out of the meeting itself is the announcement that the Fed will soon reduce the level at which it exhausts bond holdings on its balance sheet before putting an end to a process known as “quantitative tightening.” entirely.

Beyond that, the focus will be on interest rates and the central bank's unwillingness to budge at the moment.

Officials, from Chairman Jerome Powell to regional Fed bank heads, have said they don't expect to start cutting interest rates until they are more confident that inflation is heading in the right direction and back toward the 2% annual target.

Powell surprised the markets two weeks ago by speaking sternly about the extent of his and his colleagues' commitment to achieving this mandate.

“We said at the FOMC that we would need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy,” he said at a central bank conference. “Clearly, the latest data has not given us greater confidence and instead suggests that it will likely take longer than expected to achieve that confidence.”

In fact, markets have held up well since Powell made those comments on April 16, despite stocks selling off on Tuesday before the meeting. the Dow Jones Industrial Average It even rose 1% over that period with investors seemingly willing to live with the prospect of a higher-rate climate for longer.

But there is always a ghost in which an unknown person may appear.

That likely won't happen during the business portion of the FOMC meeting, as most observers believe the committee's statement will show little or no change since March. However, Powell has been known to surprise markets in the past, and his comments at the press conference will be scrutinized to see how hardened the panelists' view is.

“I doubt we'll get anything that will really surprise market prices,” Lebas said. He said Powell's comments “were very clear that we have not yet reached the threshold of significant additional evidence of slowing inflation.”

There has been a lot of data recently to support this position.

The personal consumption expenditures price index released last week showed inflation at 2.7% annually when including all items, or 2.8% for the all-important core measure that excludes food and energy. Fed officials prefer the Commerce Department's index as a better measure of inflation and are more focused on fundamentals as a better indicator of longer-term trends.

Additional evidence came Tuesday when the Labor Department said its employment cost index rose 1.2% in the first quarter, up 0.3 percentage points from the previous period and ahead of Wall Street expectations of 1%.

None of these numbers are consistent with the Fed's target and will likely prompt Powell to be cautious about where policy goes from here, with an eye on fading expectations for a rate cut anytime soon.

Futures market pricing sees only a 50% chance of a rate cut as early as September, and now expects just one quarter-point cut by the end of 2024, according to the widely watched FedWatch gauge from CME Group.

However, some on Wall Street remain hopeful that inflation data will show progress and allow the central bank to cut interest rates.

“While the recent bullish inflation surprise has narrowed the way for the FOMC to cut interest rates this year, we expect upcoming inflation reports to be softer and still expect cuts in July and November, although even moderate bullish surprises could delay Cuts further,” said Goldman Sachs economist. David Merkel said in a note.

Wall Street economists are bracing for the possibility that the Fed will remain on hold for longer, especially if inflation continues to suddenly trend upward. In addition, they said the prospect of raising tariffs after the presidential election — favored by former President Donald Trump, the Republican nominee — could be inflationary.

Moreover, Goldman is part of a growing chorus on the Street that believes the Fed's March forecast for a longer-term “neutral” interest rate — neither stimulative nor restrictive — is too low at 2.6%.

However, the company also does not expect interest rates to rise.

“We still think a rate hike is very unlikely because there are no signs of a real reheating at the moment and the funds rate is already very high,” Merkel said. “It will likely take either a serious global supply shock or very inflationary policy shocks for interest rate hikes to become realistic again.”

One of the news the Fed is likely to announce at the meeting will be a balance sheet announcement.

The central bank allowed up to $95 billion of Treasury bonds and mortgage-backed securities to mature each month, rather than reinvesting the proceeds. This process reduced the Fed's total holdings by about $1.5 trillion.

At their March 19-20 meeting, officials discussed cutting the amount of runoffs “by approximately half from the last pace,” according to minutes of the session.

As holdings are reduced, banks' reserves on deposit with the Fed will theoretically decline as institutions put their money elsewhere. However, the scarcity of Treasury issuance this year has caused the level of reserves to rise by about $500 billion since the beginning of the year to $3.3 trillion, as banks park their money with the Fed. If the level of reserves does not decline, this may prompt policymakers to implement the QT process for a longer period.