June FOMC Preview: No Rate Cut But Powell Might Provide Clearer Easing Schedule

The Federal Open Market Committee is scheduled to convene for their upcoming session on June 11-12. The committee is widely expected to keep the federal funds rate bound between 5.25% and 5.50%, a level at which it's been held for nearly one year. The CME's FedWatch tool is pricing in a 97.5% probability of no rate change.

The statement from the FOMC the June Summary of Economic Projections (SEP) are expected to be released at 2 pm Eastern Time on Wednesday, after the end of their two-day meeting, followed by a press conference with Chair Jerome Powell scheduled for 2:30 pm ET.

The resilience of the U.S. labor market persists, with employers adding a robust 272,000 new jobs in May, surpassing the highest estimates from a Bloomberg survey of 77 forecasters. Despite this strong headline number, a deeper dive into the data reveals a more nuanced picture of strength.

Job gains were notably focused in certain sectors, with healthcare and social assistance (+83,500), leisure and hospitality (+42,000), and government (+43,000) contributing to more than 60% of the previous month's job growth. This trend of concentrated hiring in industries less sensitive to economic cycles has been consistent over the past year. Meanwhile, temporary help employment—a sector often seen as a leading indicator for broader job trends—experienced continued layoffs.

The unemployment rate rose for the second straight month to 4.0% as the household survey of employment revealed a strikingly weaker picture—jobs fell by 408K, according to this measure. Labor force participation also softened and the average work week held steady.

The market reaction to the jobs report was swift, with market pricing now implying just one rate cut by year-end. Beyond the strong job gain, average hourly earnings rebounded 0.4% in May, pushing the annual rate back up to 4.1%. While this isn't exactly a favorable development in the fight against inflation, earnings can be noisy on a monthly basis. Policymakers will need to see a few slower inflation reports in order to start cutting rates by the fall; this week's CPI report is in focus.

Purchasing managers are seeing less robust price growth. The prices paid measure of both the ISM manufacturing and services indices eased in May, but they still remain consistent with an expansion in prices. More simply, most industries are still seeing higher prices, though the pace of growth is slowing. A recent uptick in manufacturing prices, however, suggests that relief from goods-related inflation may be limited this year, placing more pressure on the service sector to drive progress towards the Fed's 2% inflation target.

The SEP is a critical document published quarterly that provides insight into FOMC members' perspectives on the trajectory of economic growth, inflation, and interest rate adjustments. In its last SEP, issued in March, there was widespread anticipation among the committee members that inflation would decrease sufficiently to justify a relaxation of monetary policy within the year. The majority of the members foresaw rate cuts of 50 basis points or less, but a more dovish stance from one member raised the median expectation to 75 basis points. Additionally, the projections for the longer-term interest rates experienced a slight uptick, going above 2.5% for the first time in over two years since March 2019.

How will the Fed officials adjust its economic forecasts in the June SEP? Data released over the past few months suggest that price pressures are not going away without a fight. Core PCE deflator registered a yearly rate of 4.4% in the first quarter, significantly higher than the latter half of 2023. Despite a decrease in both core and supercore PCE inflation in April from the first quarter's surge, this single data point isn't sufficient to establish a new trend. Thus, even with expectations for inflation to gradually decrease, the higher figures from the first quarter may lead participants to revise their inflation forecasts upward and anticipate fewer rate cuts.

FOMC participants will also likely adjust their estimates for the long-term rate outlook upward. The neutral policy rate serves as a benchmark for the rate that neither stimulates nor restricts economic activity, aligning with the Fed's dual mandate of maximum employment and price stability. This rate also reflects the economy's fundamental growth potential, and while it is challenging to pinpoint, there is an increasing agreement that this rate may have risen in recent years. This is evidenced by the sustained economic resilience despite the fastest rate hikes since the 1980s. The Wells Fargo macroeconomy team anticipates that the median estimate for the longer-run interest rate in the upcoming SEP will be nudged slightly higher to a range between 2.625% and 2.75%.

In contrast, Bloomberg analyst Anna Wong expected the median member to keep the neutral rate estimate at 2.6%, even if a couple of officials revise up their estimates.

Anna Wong also noted that economic activity has surprised to the downside recently, which should prompt officials to mark down real GDP growth to 1.8% (from 2.1% in the March Summary of Economic Projections) and boost the unemployment rate forecast to 4.1% (vs. 4.0%).

In the March dot plot, it was a close call between two and three cuts this year. Cleveland Fed President Loretta Mester has indicated that she expects to switch her forecast from 75 bps of cuts this year to no more than 50 bps.

Wells Fargo anticipated that the median 2024 dot to lift to 4.875%, reflecting expectations for two 25 bps cuts this year instead of three. They also noted that “we would not be surprised if the median projection calls for just one rate cut.” Friday's employment release was chock-full of mixed messages that are unlikely to sway the committee one way or another. The May CPI is set for release on the morning of June 12, but FOMC members will probably not have enough time to incorporate it into their forecasts. Nevertheless, any new inflation data will be instructive on the trend direction of price pressures. Economists look for an incremental improvement in core CPI consistent with a return to gradual descent, but doubt it will convince the committee that inflation is sustainably headed back toward 2%. Wells Fargo’s base case remains for the first rate cut to occur in September.

The June FOMC meeting will be one of the most pivotal this year, as Fed Chair Jerome Powell may provide the clearest hint yet to the rate-cut timetable. With growth indicators consistently surprising to the downside since the April 30-May 1 meeting — even as inflation data have met expectations — Bloomberg macroeconomy team expects Powell to sound relatively dovish in his news conference.

He could imply that the current policy framework is suitably equipped to manage these risks. Should inflation remain persistently high, the Federal Reserve is prepared to sustain the present degree of monetary restriction for an extended period. Conversely, if there is an unforeseen downturn in the labor market, the Fed has the flexibility to implement more accommodative measures.

By Moomoo North American Team Calvin