Jerome Powell, Chairman of the US Federal Reserve, speaks during the conference celebrating the 100th anniversary of the founding of the Division of Research and Statistics, Board of Governors of the Federal Reserve System in Washington, DC, US on November 08, 2023. (Photo by Celal Gunes)/Anadolu via Getty Images)
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Wednesday is expected 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 way the Federal Reserve plans to respond.
In a rolling move that begins in the morning with the pivotal May CPI reading and ends with the Federal Reserve's policy meeting in the afternoon, vital signals will be sent about the direction of the economy and whether policymakers can soon take their steps off the brakes.
The day “packs months of macro risk into a single day,” UBS economist Jonathan Pingel wrote.
Like many others on Wall Street, Pingel expects the CPI report, combined with last Friday's surprisingly strong nonfarm payrolls reading and other recently released data, to prompt Fed officials to revise their forecasts for inflation, economic growth and interest rates.
Optimists hope that the moves will fall largely within the range of expected outcomes and do little to unnerve jittery market participants.
“While both have typically proven to be market-moving events, we expect very little fireworks from either release given our expectations for fairly benign outcomes,” said Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers.
Overall, the following are the expected outcomes for both events.
Inflation in the consumer price index
A measure of the cost of a broad basket of goods and services to consumers in May is expected to show little movement month-on-month – an increase of just 0.1% from April, although that still equates to an overall annual increase of 3.4%.
Excluding food and energy prices, the so-called core PCI index is expected to show monthly gains of 0.3% and an annual rate of 3.5%.
None of these numbers differ significantly from April readings, and they still show inflation to be well above the Fed's 2% target. However, some economists say that a blind look at various important metrics such as insurance costs and basic services excluding housing will show that inflation is at least heading in the right direction, if only gradually.
“On the inflation front, expect more of the same — continuing evidence that the broader disinflation trend remains intact and that the firmer first-quarter data was merely a pause in the downward trend,” Janasewicz said.
One important point about the CPI: Although it gets a lot of focus from both investors and the general public, it is not the main measure used by the Federal Reserve. Central bankers favor the Commerce Department's measure of personal consumption expenditures prices, which is a broader measure that also takes into account changes in consumer behavior.
The Bureau of Labor Statistics is scheduled to release its Consumer Price Index report at 8:30 a.m. EST on Wednesday.
Federal Reserve meeting
As the Bureau of Labor Statistics (BLS) publishes the Consumer Price Index (CPI) report, members of the interest rate-setting Federal Open Market Committee will finalize their forecasts for inflation, GDP, and unemployment as well as indicate the rate's expected path through 2026 and beyond.
First and foremost, when it comes to interest rates, the Fed will do nothing. Both market pricing and statements from policymakers suggest there is almost no chance of a move in either direction on interest rates, with the central bank keeping its benchmark overnight borrowing rate in a range of 5.25%-5.50%.
Instead, officials will take other measures that markets will watch closely.
FOMC members will issue quarterly updates to their summary of economic expectations, which may be affected by the CPI report. While meeting participants typically submit their estimates early on Wednesday, the 19 meeting participants are generally allowed a little extra time to calculate the incoming data.
The informal consensus in market commentary is that the Fed will adjust the pivot “dot chart” course to the upside. The impact of this means that the network is likely to indicate fewer than the three interest rate cuts indicated for 2024 in March, towards a path that most economists expect to show two cuts, although there is some concern that expectations may narrow to just one cut.
If the Fed signals one cut, it would likely mean the Fed won't act until November or December, UBS's Pingel said.
Economists at Goldman Sachs expect two interest rate cuts, the first in September. However, others disagree, with Bank of America calling for one and Citigroup looking at a possible three, though it expects the dot chart to suggest two.
“Our conviction remains limited because we still see cuts as optional, inflation news that we expect would make a cut decision plausible but not obvious, and FOMC participants have a range of views,” Goldman Sachs economist David Merkel wrote.
Economists also expect the Fed to lower its GDP growth forecast and raise the level of expected inflation from the March forecast.
Other important Fed developments include the post-meeting statement as well as Chairman Jerome Powell's press conference afterward.
“We do not expect any significant changes to the FOMC statement or Chairman Powell's message at the June meeting. The most prominent theme of Powell's last press conference in May was his opposition to potential rate hikes, but talk of a rate hike has subsided in markets since then. Merkel said.
In fact, only a few Fed officials mentioned in their public comments the possibility of raising interest rates to higher levels.
However, the market has been forced to significantly reprice its expectations since earlier in 2024 when traders expected six cuts this year.
The latest economic data, likely to be echoed in Wednesday's CPI report, points to an evolving economy in which higher interest rates for a longer period are being treated as a much greater possibility. For example, Friday's payroll report showed wages growing at an annual rate of 4.1%, which is much higher than the Fed would like to see.
“The still-growing U.S. economy is stubbornly holding wage growth above the Fed’s unofficial target of 3.3 percent,” wrote Nicholas Colas, co-founder of DataTrek Research. “Unless economic growth cools, it is difficult to see a path to anything more than a symbolic Fed rate cut in 2024.”
