- The Fed’s statement may indicate progress on inflation, hinting at future rate cuts.
- Recent economic data and cautious Fed policy temper rate-cut expectations.
This week, officials of the Federal Reserve are expected to indicate significant progress on inflation, which might open the door for further interest rate reductions, according to crypto journalist Collin Wu.
With a statement anticipated that would express their optimism on the inflation front, there is a lot of expectation following their meeting.
Fed added to its statement after its last meeting May 1: It said “there has been a lack of further progress" in bringing inflation back to the central bank's 2% target. If the May inflation report being released Wednesday shows further signs of improvement, it's possible the Fed…
— Wu Blockchain (@WuBlockchain) June 11, 2024
Inflation Report’s Impact on Fed Decisions
The Fed starts its second day of policy talks on Wednesday morning, so uncertainty is building as officials await the government’s most recent inflation snapshot. One line from their May 1 statement emphasizing the “lack of further progress” in reaching the central bank’s 2% inflation objective will be a major emphasis.
Hopes for a consistent cooling trend seen in the second part of the previous year had been dashed by the startlingly high inflation in the first quarter.
But April did exhibit some alleviation, and if May’s data shows more improvement, the Fed may change their wording and remove the depressing line.
Such a step would indicate possible rate reductions in the next few months, which would lower the cost of mortgages, auto loans, and other consumer and commercial borrowing.
Economists’ Caution on Rate CutsÂ
Still, the majority of economists do not forecast rate reductions until September at the latest. Fed Chair Jerome Powell is likely to stress that rate cuts should wait until after several months of consistently low inflation.
A Fed rate drop would help the economy somewhat and help President Joe Biden’s reelection campaign by allaying voter worries about the recent inflation surges. Consumer inflation still exceeds the Fed’s target, even though it fell sharply from its peak of 9.1% in mid-2022 to 3.4% in April.
If unemployment rises and the economy lags, the Fed may lower rates more swiftly. But strong job gains in May have dampened such predictions; Wall Street has reduced its rate cut projections from two to one this year.
Current Fed Rate and Forecasts
The Fed is predicted to keep its benchmark rate at about 5.3%, its highest level in 23 years, where it has been since July. Updated economic forecasts are probably going to show that, instead of three rate reductions predicted in March, there will only be one or two by year’s end.
Powell is going to be cautious and probably stress that additional proof of inflation hitting 2% is required before rate reductions are even discussed. Former Fed economist Nathan Sheets highlights the Fed’s steady theme of battling inflation without hurrying to lower rates.
Signs of Economic WeaknessÂ
Powell could also address indications of a slowing economy, as growth fell precipitously to 1.3% annually in the first quarter from 3.4% in the last quarter of the prior year. Further indicating financial strains on Americans were the fall in consumer expenditure adjusted for inflation and the three-year low in job vacancies in April.
Although the unemployment rate increased for the second straight month to 4%, May’s job growth has allayed some worries.
These teasing indications of weakness feed the discussion among Fed officials over the extent to which higher rates are hurting the economy. Some politicians have indicated that, considering past robust growth and employment gains, they are open to more rate increases.
A cooling economy supports the Fed’s narrative of restrictive policy. President of the Fed’s New York branch, John Williams, recently said that lower home sales and spending on expensive items are proof that higher rates are in fact slowing down the economy.
What About Crypto?Â
Economic events and potential Fed rate reductions have a significant impact on the cryptocurrency market. Lower interest rates usually increase the value of assets, including bitcoin, since investors look for bigger returns on riskier assets, echoing earlier coverage by ETHNews.
The crypto market will be watching intently for indications of rate reductions as the Fed makes its policy decisions, since this could lead to higher investment and volatility in digital assets. Let’s see.