Fed Meeting Starts Today: Interest Rate Cut Highly Unlikely, But This Is What Could Still Move Markets

The Federal Reserve's FOMC meeting commenced this week, with expectations pointing towards holding steady the current 4.25%-4.5% interest rate range; the focus is on the updated quarterly summary of economic projections (dot plot). Market participants anticipate the dot plot will reveal a shift towards only one expected rate cut in 2025, contrasting with the March forecast of two cuts this year, and Goldman Sachs economists project inflation to rise to 3.3% by December. Analysts predict that a reduction in the expected rate cuts could trigger a selloff in stocks, while maintaining the forecast of two cuts might induce a mild rally, contingent on Chairman Powell's commentary regarding potential July rate adjustments.

Analysis

The Federal Open Markets Committee (FOMC) is widely expected to maintain the federal funds rate at its current 4.25% to 4.5% range during its meeting concluding Wednesday, thereby shifting investor focus squarely to the release of its quarterly summary of economic projections, or dot plot. This dot plot is pivotal as it will unveil policymakers' updated outlook for key economic data points and, most critically, the median expectation for future interest rate adjustments. Projections for the 2025 rate path diverge: Bank of America forecasts the new dot plot will indicate only one 25 basis-point cut in 2025, a more hawkish stance compared to the March dot plot's indication of two cuts for the current year, while Goldman Sachs anticipates the Fed will reiterate a projection of two cuts for 2025. Goldman Sachs further projects core personal consumption expenditures inflation, the Fed's preferred measure, to rise to 3.3% by December, alongside an increase in unemployment to a four-year high of 4.5% and a deceleration in real gross domestic product growth to 1.3%. The Federal Reserve's prevailing caution, largely attributed to the uncertain economic ramifications of U.S. tariffs, persists despite some economic indicators that might typically support easing and considerable political pressure from the White House advocating for rate reductions. Consequently, equity markets are poised for potential volatility; a revised dot plot signaling only one rate cut in 2025 could precipitate an estimated 1% decline in the S&P 500 benchmark index, as per Sevens Report analysis. Conversely, a reaffirmation of two cuts for 2025 could foster a mild market rally, with potential for more significant gains if Chairman Powell's subsequent press conference conveys openness to a rate cut at the July meeting, an outcome currently deemed unlikely with only a 13% probability according to the FedWatch Tool.

Key Decisions for Investors

• Investors should meticulously examine the updated Federal Reserve dot plot, particularly the median projection for 2025 rate cuts, and scrutinize Chairman Powell's press conference for nuanced policy signals.
• Prepare for potential equity market volatility following the FOMC announcement, acknowledging the specific downside risk of an approximate 1% S&P 500 contraction if the Fed signals a more hawkish outlook with only one rate cut projected for 2025.
• Closely monitor upcoming core PCE inflation data, employment figures, and GDP growth reports, as these metrics will be crucial in shaping the Fed's policy decisions, especially considering Goldman Sachs' forecasts for rising inflation and slowing economic growth.
• While the FedWatch Tool indicates a low (13%) probability of a July rate cut, any unexpected dovish commentary from Chairman Powell regarding this possibility could significantly influence market sentiment and warrants careful attention.