Last week, the ECB cut interest rates, which came as no surprise to anyone. Meanwhile, the Polish Monetary Policy Council (RPP) maintained its monetary policy parameters, supporting the złoty. Now, it’s the Federal Reserve’s turn, which will likely keep the cost of money at the current level of 5.25 – 5.5% tomorrow. Attention will be focused on new macroeconomic projections, and volatility could be triggered by the publication of the new “dot chart.” Just hours before the decision is announced, we will receive the inflation report. The EUR/USD exchange rate has remained around 1.0750 following declines on Friday and Monday. Wall Street ended yesterday’s session in positive territory, though the gains in major stock indexes did not exceed 0.4%. Today’s macroeconomic calendar is sparse.
Last year was quite favorable for the Federal Reserve. The economy performed very well despite massive interest rate hikes. The disinflationary process proceeded without significant disruptions. This year, however, the decline in CPI has been halted, and the measure of inflation using the Personal Consumption Expenditures (PCE) deflator has slightly increased. Core inflation remains above the Fed’s target (2%) at 2.8%. Additionally, U.S. GDP growth slowed in the first quarter, with a growth rate of 1.3%, and forecasts for the period from April to the end of June do not indicate significant improvement. However, the probability of a recession remains very low.
Weaker labor market data, which we have been receiving for some time, should serve as an argument for the Fed that restrictive monetary policy is working as intended. Undoubtedly, a stronger reduction in the labor market surplus must occur before the Fed starts to “ease.” This will translate into slower wage growth, which will ultimately reduce overall inflationary pressure in the future. However, as long as more than 100,000 new jobs are created each month, the Federal Reserve does not need to rush its actions. The May NFP report showed strength, with the creation of 272,000 new jobs surprising the market, which reduced the probability of a rate cut at the September meeting from about 60% to 50%, and the chances of a December move fell below 70% from nearly 76% before the publication.
This Wednesday, new macroeconomic projections and the current “dot plot” will be released. Recall that the March forecasts indicated three cuts in 2024, each by 25 basis points. Now, the market will react to whether three downward moves this year remain the baseline scenario. Recent data have distanced us from its realization, but confirmation will come tomorrow. The outlook for the rate cut path in 2025-2026 will also be crucial. On the same day, we will receive the inflation report. High volatility is guaranteed.
Łukasz Zembik, Oanda TMS Brokers
