As concerns over high inflation persist, the expected timing of a pivot (policy shift) within the U.S. Federal Reserve (Fed) is being pushed further back. Just over a month ago, even officials who considered three rate cuts within the year as "reasonable" according to the Fed's dot plot have now deemed that outlook "inappropriate." There is a growing consensus that the dot plot will be revised upward to reflect the current situation at next month's Federal Open Market Committee (FOMC) meeting.
On the 20th (local time), Loretta Mester, President of the Cleveland Federal Reserve Bank, stated in an interview with Bloomberg TV, "Considering the first-quarter inflation data, I now believe that three rate cuts in 2024 are no longer appropriate."
She described the current monetary policy as "restrictive" but pointed out that the easing trend in inflation during the first quarter has stalled. She added, "The April Consumer Price Index (CPI), which came in below expectations, is good news, but it is too early to say how inflation will evolve," diagnosing that "inflation risks are tilted to the upside." Known as a hawkish figure within the Fed who favors monetary tightening, she did not rule out the possibility of rate hikes if inflation rebounds.
This contrasts with Mester's statement last month when she said, "I still think three rate cuts within the year are reasonable." The ongoing concerns about inflation rebounding have led her to adopt a more hawkish stance.
On the same day, Raphael Bostic, President of the Atlanta Federal Reserve Bank, reaffirmed his previous position that only one rate cut is likely within the year. He predicted, "It will take longer than expected to be confident in achieving the 2% inflation target."
Vice Chairs Philip Jefferson and Michael Barr also emphasized cautious rate decisions, warning that inflation could rebound. Jefferson called the April core CPI, which came in below expectations, encouraging but "not sufficient on its own." Barr described the first-quarter inflation figures as disappointing and said, "More time is needed for policy to take effect." The Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, rose 4.1% from January to April this year, well above the inflation target.
Accordingly, voices both inside and outside Wall Street are growing louder that the dot plot will be revised upward at the upcoming June FOMC meeting. Previously, at the March FOMC, the Fed maintained its year-end rate forecast at 4.6%, contrary to market expectations. Despite concerns about the "last mile," the Fed continued to signal that three rate cuts within the year were possible. The Fed updates its dot plot, which reflects rate projections, every March, June, September, and December.
Market consensus also leans toward rate cuts being possible no earlier than September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in about a 60% chance that the Fed will cut rates by at least 0.25 percentage points at the September FOMC. The probability that rates will remain unchanged through July following a June hold is close to 80%.
Meanwhile, investors are focusing on the May FOMC minutes to be released on the 22nd. After the May FOMC, Fed Chair Jerome Powell held a press conference where he signaled a prolonged high-rate environment but dismissed the possibility of further rate hikes, which was seen as more dovish than expected. The minutes will clarify whether Powell's remarks reflected his personal views or accurately represented the committee's discussions. This week, public remarks by Board member Christopher Waller and others are also scheduled.
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