Analyzing the Fed's Updated Inflation Expectations | Episode 144 | 06-12-24

We delve into the intricacies of the June Federal Reserve meeting, shedding light on the pivotal decisions and projections that could influence your financial landscape. This episode provides a comprehensive breakdown of the Fed's updated outlook on GDP, unemployment, and core PCE inflation. Despite the buildup to the meeting, the Federal Reserve decided to keep interest rates unchanged. However, the real story lies in the Fed's nuanced economic projections and the subsequent market reactions.

One of the most notable aspects of the Fed's June meeting was its cautious optimism. The Federal Reserve's updated projections indicate that they are taking a data-dependent approach, adjusting their expectations based on the latest economic indicators. For 2024, the Fed's median projection for GDP remains steady at 2.1%, while the unemployment rate is projected to stay at 4%. These figures suggest a stable economic outlook, but the slight increase in the median projection for core PCE inflation to 2.8% from 2.6% is significant. This uptick in inflation expectations means that the Fed is now anticipating only one interest rate cut in 2024, down from three projected in March.

The Fed's decision to hold interest rates steady was widely anticipated, but the language used in their announcements was closely scrutinized. The Federal Reserve emphasized their commitment to monitoring economic data and adjusting their policy accordingly. They acknowledged progress in reducing inflation but reiterated that more work is needed to bring it down to their target levels. This cautious stance reflects the ongoing challenges in managing inflation, which remains a concern despite recent improvements.

Market reactions to the Fed's announcements were mixed. Initially, there was a rally in equity markets following the release of the Consumer Price Index (CPI) report for May. However, this enthusiasm was tempered by the Fed's cautious tone during their press conference. While bond yields did rise slightly, they remained lower on the day. The market's response underscores the complexity of interpreting the Fed's projections and the uncertainty surrounding future economic indicators.

The episode also explores the potential impact of upcoming economic reports on the Fed's strategy. Key indicators such as the Producer Price Index (PPI), Personal Consumption Expenditures (PCE), and employment reports will provide further insights into the state of the economy. Additionally, data from the ISM manufacturing and services sectors will be crucial in shaping the Fed's decisions in future meetings. The Federal Reserve's data-dependent approach means that these reports will play a significant role in determining the direction of interest rates.

Well, we're back for round two of Our Markets with Megan. Today it is Wednesday, june 12th, and this morning we came to you with the Consumer Price Index report from May, and now we're coming to you with the June Federal Reserve meeting. This was a very highly anticipated meeting. There was no expectation that they would cut interest rates at this meeting, and they did not. They kept interest rates unchanged. But the focus was on how they would word this. What was their expectation for the rest of this year? What would they do with their expectations for both unemployment, inflation, the Fed funds rate, as well as GDP? So let's take a look at what they did come out with. So for the Fed projections, the median projection for 2024 in regards to GDP did not change it's 2.1%. The unemployment rate also did not change, looking for 4% this year. And then the median projection for core PCE actually did increase a bit to 2.8% versus 2.6%. So if you have an increase in the median expectation for core inflation, which is their PCE, is their preferred measure, that would typically translate into the expectation for less interest rate cuts, and that's what we got in this report.

Right now, fed officials are only expecting one interest rate cut this year. We don't know the timing of that. That is down from their March projection. I'm seeing three interest rate cuts Now. They reiterated in their press conference that they remain data dependent and we realize that they were given the report from this morning and they could make adjustments if necessary, but they did not. They think that there is progress being made on inflation but they're not there yet. And this is what we've been saying frequently, that inflation is getting better. We say better from a very high point but when you're still growing over 3% on an annual basis, that is continuous strain on consumers and that is still an inflationary environment. And the Fed did come through and say that today that they're more concerned about getting that down, being confident that it's coming down to their target before they even talk about interest rate cuts. They did make one comment there's been some wrangling around. When we got some hotter than expected reports earlier this year that we may see an interest rate hike, they said there were no committee members that actually talked about an interest rate hike at this time.

So the markets we had a great rally after the CPI report. That has given quite a bit of that back, basically flat here in the equity markets, bond markets. The yields did go up a bit, but still they're lower on the day. There's a lot more information to come out from the PPI, pce, the employment report. We'll get data on ISM manufacturing, ism services. All these things will come out before they meet next. So there's a lot of information to go through and we'll be sure to come back to you to reiterate our view, talk about what we think and, if that changes anything, where we expect the Fed going with interest rates. If you have any questions or comments, please feel free to reach out to podcasts@verdence. com. Thank you.