Note to readers: Live coverage of today's Fed meeting can be found at this link.
Today's Federal Reserve meeting policy update is likely to show a more hawkish near-term interest-rate outlook, with Federal Open Market Committee members penciling in just one rate cut in 2025 — and it won't be this week. That would indicate one fewer rate cut than the prior set of quarterly Fed projections showed in March.
The S&P 500 might not love the updated outlook, but it won't come as a shock. Fed Chairman Jerome Powell's communications turned more hawkish about the inflation outlook just after President Trump's "Liberation Day" tariffs on April 2. While Trump put country tariffs excluding China above 10% on hold a week later, uncertainty still reigns about the eventual level of tariffs, as well as the amount of fiscal stimulus coming from the GOP fiscal package.
Fed Meeting Expectations On Wall Street
"Our baseline is that the median dot only shows one rate cut this year, though we admit it is a close call," wrote Deutsche Bank's U.S. economics team.
Deutsche Bank came down on the side of more hawkish rate projections, partly because "the recent spike in oil prices in response to tensions in the Mideast should leave the Fed even more vigilant around inflation expectations."
The March dot-plot — with each dot representing the view of one FOMC member — showed that four members of the policy-setting committee expected no rate cuts in 2025 and another four expected just 25 basis points in cuts. The other 11 policymakers expected at least 50 basis points in rate cuts.
"The median was just two votes from flipping to a 25 (basis points) easing" from 50 basis points, wrote Samuel Tombs, Pantheon Macroeconomics chief U.S. economist. "With most members saying recently they want to see how the tariff shock begins to play out, we think the median participant will envisage easing by just 25 (basis points) this year."
Stock Market Forecast For The Next Six Months: What You Should Know
Labor Market Commentary Will Be Key
The Fed has put rate cuts on pause this year, keeping rates in restrictive territory, as the risk of higher inflation, which argues for higher rates, balances the risk of higher unemployment, which would argue for lower rates.
With inflation running above target and an expectation that it will keep moving higher, Powell made clear that the Fed won't act preemptively to avoid a rise in unemployment. However, once the labor market has turned cold, the case for rate cuts will strengthen, and signs are growing that the time is drawing near.
These Are The 5 Best Stocks To Buy Or Watch Now
While the May jobs report showed a respectable 139,000 gain in nonfarm payrolls, job gains for March and April were revised down a combined 95,000. The household survey, though it comes with a higher margin of error, showed the ranks of the employed tumbling by 696,000.
Powell will elaborate on his view of the job market at his 2:30 p.m. ET news conference on Wednesday, but markets will take their cue from the 2 p.m. policy statement. Any softening of the assessment that "labor market conditions remain solid" would provoke a market reaction, with bond yields falling and the S&P 500 likely rising.
Market Expectations For Fed Rate Cuts
Ahead of today's Fed meeting, markets are pricing in virtually zero odds of a rate cut and only 1.45% odds of a rate cut by the July 30 meeting, according to CME Group's FedWatch tool. Odds of a rate cut rise to 65% for the Sept. 17 Fed meeting.
For the full year, markets see 65% odds of at least 50 basis points in rate cuts, which would lower the Fed's key rate to a range of 3.75% to 4%.
S&P 500
S&P 500 futures are essentially flat in early Wednesday stock market action. On Tuesday, the S&P 500 fell 0.8% amid concern that an escalation of the Israel-Iran conflict could lead to a further jump in oil prices.
The S&P 500 finished 2.6% off its all-time closing high on Feb. 19.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
