Xiao Cui, Senior Economist, at Pictet Wealth Management, ahead of tomorrow’s Fed meeting.
- We expect no changes to the federal funds rate or balance sheet policy. There will be no new dot plot or economic projections.
- We expect Chair Powell to acknowledge that recent policy changes are likely to divert the economy from the Fed’s dual mandate but that monetary policy is “well positioned” to respond to the evolving outlook. He is likely to emphasize the Fed’s responsibility in ensuring that tariff-driven inflation does not become persistent and that achieving sustainable maximum employment requires price stability. We don’t expect explicit forward guidance from Powell on the rate path, but he is likely to rule out pre-emptive insurance cuts. Recent Fed communications and resilient hard data suggest the Fed is unlikely to act before the July FOMC meeting.
- The policy statement may downgrade its assessment of economic growth and possibly note declining sentiment in surveys and increased uncertainty in the economy. It would be slightly hawkish if the statement mentions that some survey-based measures of near-term inflation expectations have risen.
- We believe the Fed will be patient in cutting rates amid upside inflation risks but will act decisively if the labor market shows clear signs of deterioration. Therefore, the key question for timing a rate cut is if and when hard data will indicate sufficient economic slowing for the Fed to intervene. We expect soft survey data to continue deteriorating, followed by weakening hard data likely to emerge in the summer. We continue to expect the Fed to start cutting rates in July, by 100bps in total this year. Markets are fully priced for a cut by July, with 79bps priced for this year.
- Although the FOMC meeting might be uneventful, President Trump may continue criticizing the central bank, suggesting Powell is always late in taking action. We don’t expect Trump to dismiss Powell before his term ends in May 2026, although some Fed contenders have recently started criticizing the Fed’s actions.
