Wall Street is bracing for a rare doubleheader on Wednesday, with the latest inflation data due to be released in the morning and the Federal Reserve due to announce its interest rate decision in the afternoon.
“Wednesday will be an exciting day with the CPI report in the morning and the FOMC meeting statement in the afternoon,” said David Donabedian, chief investment officer at CIBC Private Wealth U.S. “This gives us a one-day look at the two biggest issues for the market: inflation and monetary policy.”
Investors will get a chance to find out just how high inflation was in May just hours before the Fed wraps up a two-day meeting and issues new economic forecasts that will project the direction of interest rates this year.
According to Bank of America, since 2014, the CPI release and the Fed’s policy meeting have only occurred on the same day seven times.
Here’s what to expect from the major events that could shed light on the current state of the U.S. economy and shake up the stock market.
May inflation data may show ‘sticky’ price pressures
Economists expect the consumer price index, which measures a range of goods including gasoline, health care, groceries and rent, to have risen 3.4% in May, unchanged from the previous month.
On a monthly basis, inflation is expected to rise 0.1% from 0.3% in April.
“This marks the 12th consecutive month that the CPI has lurched between 3.7% and 3.1%,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Several promising sets of downward trends have been followed by disappointing sets of readings, resulting in the CPI going nowhere in a year. This is a maddening, troubling and stubborn situation.”
U.S. Bureau of Labor Statistics
Other parts of the report are expected to point to a more gradual decline in inflation. Core prices, which exclude volatile measures like food and energy, are now forecast to rise 3.6% annually. That’s up slightly from a 3.5% increase in April, suggesting underlying price pressures remain strong.
The Federal Reserve’s target interest rate is 2%, but central bank policymakers tend to rely on a different measure of inflation called personal consumption expenditures (PCE).
The Labor Department is scheduled to release the data at 8:30 a.m. ET on Wednesday.
Fed expected to keep interest rates at 23-year high
Federal Reserve officials are widely expected to keep interest rates on hold in a range of 5.25% to 5.5%, the highest level in 23 years.
But investors will be more focused on the updated quarterly economic forecasts due to be released after the Fed meets, which will also include a forecast of where policymakers expect key interest rates to be at the end of 2024.
Economists expect the Fed to adjust its so-called dot plot to indicate policymakers may cut interest rates two times this year, rather than the three they planned when they met in March.Other changes economists think could be made to the forecast include slower economic growth and higher inflation at the end of the year.
“The dot plot shown in March had a median forecast for the fed funds rate at the end of 2024 of 4.6%, implying three rate cuts, but that forecast now looks outdated, naïve and wildly overoptimistic,” North said. “Wednesday’s forecast now calls for only two rate cuts in 2024.”
Experts say they will also be closely watching Fed Chairman Jerome Powell’s press conference at 2:30 pm ET to see if he offers any hints about the future direction of monetary policy. Powell is expected to stick to his message that policy has likely peaked in this tightening cycle, but the central bank needs more evidence that inflation has been conquered before turning to rate cuts.
“We’re not likely to see any major changes to the FOMC statement or Chairman Powell’s message at the June meeting,” said Goldman Sachs economist David Mericle. “The most talked-about theme of Chairman Powell’s final press conference in May was his pushback against the possibility of a rate hike, but talk of rate hikes has died down in the market since then.”
Policy makers have raised interest rates sharply in 2022 and 2023 to their highest levels since the 1980s in a bid to slow the economy and tamp down inflation.
Fed officials are now wondering when to take their foot off the brake.
Most investors now expect the Fed to start cutting rates in September and just two more this year — a dramatic change from earlier this year, when they expected as many as six rate cuts to begin as early as March.
Higher federal interest rates tend to lead to higher interest rates on consumer and business loans, forcing employers to cut spending and slowing the economy.
Rising interest rates have pushed the average rate on a 30-year mortgage above 7% for the first time in several years.
The cost of borrowing everything from mortgages to car loans to credit cards has also skyrocketed.
