FOMC meeting preview, June 11–12

Sometimes it’s wise to listen to your siblings. 

• The Federal Reserve will hold the federal funds rate unchanged at 5.25%–5.50% at next week’s Federal Open Market Committee (FOMC) meeting. That much we know. The rest of the Fed communication is unknown at best and unclear at worse.

• The policy statement is unlikely to change much with a myopic focus on idiosyncratic inflation developments in Q1, and a lack of reference to expected inflation dynamics, the breadth of inflation and monetary policy transmission. Even if some policymakers may favor removing the “lack of further inflation progress” language, there is unlikely to be a consensus. We also don’t believe there will be a consensus around removing the negative conditionality statement for rate cuts (“the Committee does not expect … until it has gained greater confidence”).

• The Fed will continue tapering the quantitative tightening program with adjusted redemption caps on Treasury securities at $25b per month and on agency mortgage-backed securities at $35b.

• We anticipate the dot plot of median rate expectations will feature only one 25 basis points (bps) rate cut in 2024, down from three in the March and December dot plots. The dot plot will likely continue to show three expected rate cuts in 2025.

• The Summary of Economic Projections (SEP) will likely show modestly lower GDP growth expectations in 2024 (down from 2.1% in the March SEP), a slightly higher expected unemployment rate (from 4.0%) and higher personal consumption expenditures (PCE) inflation (relative to 2.4%) and core PCE inflation expectations (relative to 2.6%).

• We expect Fed Chair Jerome Powell may reintroduce a reference to the policy rate likely being at its peak for this cycle in his introductory remarks to avoid any misled belief that the bar for rate hikes is low. During the press conference, however, Powell will likely want to retain as much optionality as possible. As such, he will likely emphasize that every meeting is “live” and reiterate the now-familiar refrain stating that monetary policy remains data-dependent. We believe it’s unlikely that the Fed Chair will say that he doesn’t anticipate the FOMC will have sufficient confidence to ease policy in July even if the May jobs report effectively closed the door on a July rate cut.

• The contrast in communication among G7 central banks is notable. In the past week, both the Bank of Canada and the European Central Bank have implemented 25bps, while also conveying a sophisticated forward-looking narrative. These central banks emphasized recent progress toward their inflation targets, paying close attention to underlying inflation dynamics and considering the impact of monetary policy restriction on economic and inflationary conditions. They also made clear that the start of their easing cycles does not commit them to a fixed monetary policy trajectory. Federal Reserve policymakers would benefit from observing and learning from the approaches taken by their counterparts in Canada and Europe.

• Slower consumer spending growth, reduced markups, declining rent inflation and moderating wage growth will support further US disinflation even if a temporary plateau forms around 2.7% during the summer. We foresee headline and core PCE inflation ending the year around 2.6% year over year.

• While it’s not unusual for Fed policymakers to be extra cautious when approaching the onset of a new monetary policy cycle, the focus and debate around the timing of the first Fed rate cut has become excessive. Nothing says the Fed should cut at every meeting, or every other meeting once the easing cycle starts. We continue to believe a July onset of the easing cycle would have been optimal given easing inflation and softening labor market conditions, but a September onset is now more likely given policymakers’ backward-looking hawkish bias.