Speculation turns to summer rate cut potential as Fed pause looks likely

Market participants are looking for any sign that the US Federal Reserve will be moving interest rates this summer as the central bank appears poised this week to keep its pause in place.

The benchmark fed funds rate has been frozen since July 2023, as inflation has cooled, but leveled off well above the Fed's 2% target and expectations for multiple rate cuts this year have been pared back. The Fed began hiking rates in March 2022, pushing its benchmark federal funds rate up 525 basis points over 16 months to temper a historic surge in inflation.

The rate-setting Federal Open Market Committee will likely make no rate moves at its meeting this week, though Fed Chairman Jerome Powell at his May 1 press conference could indicate how soon the central bank might move to ease monetary policy. Powell could indicate that cuts are still a ways off.

"This meeting won't offer a new Fed forecast but the policy statement and Chair Powell's post-meeting comments will likely tilt more hawkish," said Oren Klachkin, a financial market economist with Nationwide. "Simply put, they don't yet think the 2% inflation goal is firmly within reach."

While inflation has failed to cool as much as the Fed has hoped, central bank officials are almost certainly done hiking rates this cycle, a point Powell could repeat at his press conference.

"Rate hikes appear off the table for now," said Bret Kenwell, a US investment analyst at eToro. "While the discussion has gained traction, the Fed has not signaled a rate hike is in the cards and the bond market is not pricing in a probability of it happening — either now or in the future."

The Fed has indicated it expects three rate cuts this year, but the market is pricing in just one, Kenwell said.

Market sentiment has shifted from expectations earlier this year of at least four rate cuts throughout 2024. Investors now anticipate the first cut in September and a slim majority of the market as of April 29 expected that may be the only one this year, according to the CME FedWatch Tool, a measure of sentiment in the fed funds futures market.

With inflation yet to head lower in a persistent fashion and the labor market remaining relatively strong, there is no urgency to cut, a point Powell will likely reiterate, said Sonu Varghese, director of investment platform at Carson Wealth.

"I don't think the Fed and Powell will tell us anything we don't already know," Varghese said.