Interest rate cut clues could emerge from Fed's meeting this week

While almost no one expects the Federal Reserve to cut interest rates this week, it is likely US central bankers will give a strong indication of where they see monetary policy headed into 2025.

The rate-setting Federal Open Market Committee (FOMC) is scheduled to meet June 11 and 12, and officials are widely expected to leave the Federal Reserve's benchmark interest rate within the target of 5.25% and 5.50%, where it has been since July 2023.

When the Fed will cut rates — one of the biggest mysteries currently perplexing financial markets — could be signaled in the quarterly economic projections from Fed officials, set to be released following this week's meeting.

"While the Fed won't make any changes to interest rates this week, the updates to the economic forecasts will be significant," said Matthew Weller, global head of market research with FOREX.com and City Index.

Back in March, when the last quarterly projections were released, the median forecast was for the federal funds rate to end 2024 at 4.6%, meaning three cuts of 25 basis points each by December, and 3.9% by the end of 2025, or three additional cuts in 2025.

With just four FOMC meetings left before the end of the year, inflation still substantially above the Fed’s 2% goal and unemployment remaining relatively low, these rate projections could be boosted, reflecting views among Fed officials that rate cut expectations should be pared back.

The forecasts for interest rates in 2024, to be released after this week's meeting, could be raised to above 4.75% from 4.6%, reflecting two cuts in 2024 instead of three, said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics.

"We continue to think the Fed will err on the side of caution with inflation, opting to wait until December to start easing," Tang said. "However, we think the [projections] will imply two cuts this year. If it projects only one, it sounds too definitive against easing earlier, whereas the opposite does not hold true."

While the rate forecasts will show two or less rate cuts in 2024, the projections for 2025 are harder to predict but could also increase slightly, said Kathy Jones, managing director and chief fixed-income strategist with the Schwab Center for Financial Research.

"Overall, the Fed tends to move gradually, but the direction of estimates is closely watched," Jones said. "I expect it will mean holding at a higher level for longer."

Outside of interest rates, Fed officials are also likely to boost their forecasts for GDP growth, to 2.5% or more from March's estimate of 2.1%, said Weller with FOREX.com.

Global cuts

The Fed meeting will conclude nearly one week after the European Central Bank cut its benchmark interest rate by 25 basis points to 3.75%. The Bank of Canada on June 5 became the first G7 country to cut rates, trimming its key rate by 25 basis points to 4.75%.

Fed watchers do not believe US central bankers will feel pressure to cut as other countries move to do so.

"I don't think the Fed feels any pressure from the ECB or BOC to cut rates," Jones with Schwab said. "The dollar has strengthened a bit but mostly due to weak economic data in Europe. If anything, the other central banks will need to monitor what the Fed does to make sure their currencies don't weaken too much."