Fed expected to dial back 2024 rate calls after digesting new inflation data

Investors are bracing for Federal Reserve officials this afternoon to dial back estimates of interest rate cuts in 2024.

Before policymakers go public with those predictions, they get a fresh inflation reading from the Consumer Price Index (CPI) that is expected to show continued moderation in May after an encouraging April.

The year-over-year change in so-called “core” CPI — which excludes volatile food and energy prices the Fed can’t control — is expected to edge down a tenth of a percent to 3.5%, compared with 3.6% in April and 3.8% in March.

Yet this improvement isn’t likely to alter the cautious stance on the part of the Fed, which is widely expected at its policy meeting today to hold rates steady at a 23-year high.

It will release a new projection about 2024 rate cuts in the form of a so-called “dot plot,” a chart updated quarterly that shows the prediction of each Fed official about the direction of the federal funds rate.

In March, the dot plot revealed a consensus among Fed officials for three cuts. Now that projection is in question following a string of sticky inflation readings during the first quarter and cautious commentary from Fed officials.

Most investors now expect just one cut, down from the six cuts they expected at the start of the year.

Fed officials on Wednesday will also release fresh forecasts for inflation, the economy and unemployment.

Fed Chair Jay Powell has made clear that, before cutting rates, the Fed will need more than a quarter’s worth of data to make a judgment on whether inflation is steadily falling toward the central bank’s goal of 2%.

Thus the September meeting is viewed by many as an optimistic case for a first cut. For that to happen, today’s inflation report and the two that follow in the coming months would likely need to show improvement for the central bank to pull the trigger.

As of Tuesday, markets were pricing in a roughly 48% chance the Federal Reserve begins to cut rates at its September meeting, according to data from the CME Group.

The November and December meetings are considered by many Fed watchers as more likely opportunities for a first cut.

The Fed will announce its policy decision at 2 pm ET, followed by Powell’s press conference at 2:30 pm ET.

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