This Wednesday is very exciting, and global investors are closely watching the key decision of the Federal Reserve: Will it cut interest rates once, twice, or not at all this year? The latest "dot plot" released on that day is the most critical.
Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency", predicted in his latest article that the Federal Reserve may announce on Wednesday that it will continue to maintain the federal benchmark interest rate in the range of 5.25%-5.5%:
Federal Reserve officials are likely to hold back in their closely watched policy statement and suggest their next move is more likely to be a rate cut than a hike.
Nick Timiraos provides a “theoretical basis” for his views in the article:
For Fed policymakers, the decision and potential disagreements about whether and when to cut interest rates are issues for the future, not for the present. Right now, their positions are highly consistent, but the enthusiasm of market investors for the Fed's rate forecasts has obscured this.
After ending their rapid pace of rate hikes last year, Fed officials generally believe the best course of action for an economy with solid growth and inflation still just above target is to stay the course. They are using the summer to assess the impact on employment, consumption and inflation a year after rates hit a 20-year high.
Nick Timiraos also believes that since there is unlikely to be major policy changes at the FOMC meeting on Wednesday, the focus of the day should be on the new quarterly interest rate forecasts, or "dot plots." In March, most officials expected two or three rate cuts this year.
The US CPI data for May, which will be released at 20:30 Beijing time on Wednesday, will be a key determinant. If inflation rises again beyond expectations, it may prompt more Fed officials to reduce the number of interest rate cuts this year to one. If the data is basically in line with expectations, the expectation of two interest rate cuts this year may prevail.
Many investors believe that the Federal Reserve will only start cutting interest rates in September if the median forecast of the dot plot is two rate cuts this year. If the median is one rate cut, it means that the rate cut will not begin until later this year.
Jan Hatzius, chief economist at Goldman Sachs, said:
This would be seen as a fairly strong signal.
Nick Timiraos said the different rate cut forecasts also hinted at upcoming disagreements within the Fed, which are currently being masked by solid employment and economic growth data.
"Hawkish" officials are more concerned about inflation, and while they are not actively advocating for a resumption of rate hikes, they appear to want to cancel or postpone any plans to cut interest rates.
"Dovish" officials are worried that high interest rates will lead to unnecessary weakness in the economy, but if there is no "good news" on Wednesday, it will be difficult to push for rate cuts as soon as possible.
That could make September the earliest chance for a rate cut unless the economy deteriorates dramatically. While the dot plot may offer some clues, with three months to go and several more inflation, employment and consumption data to be released, it may be difficult for Fed officials to make a strong statement at this meeting.
