The Fed is likely to keep rates the same, but give a forecast that moves markets. What to expect

The Federal Reserve is expected to hold steady on interest rates at this week's meeting, while closely monitoring economic data and geopolitical risks, including tariffs and Middle East tensions. Investors will be focused on the Fed's updated economic projections, particularly the dot plot, to gauge the likelihood of future rate cuts, with the market currently pricing in a cut by September. While some economists anticipate the Fed will maintain its forecast of two rate cuts this year, others, like Bank of America and Goldman Sachs, foresee only one or none, citing factors such as low inflation and limited signs of economic softening.

Analysis

Federal Reserve officials are anticipated to maintain current interest rates at their upcoming meeting, adopting a "wait-and-see mode" as described by Bank of America economist Aditya Bhave. Key focal points for investors will be the Federal Open Market Committee's (FOMC) "dot plot," which in March indicated a median forecast of two quarter-percentage-point rate cuts this year, and Chair Jerome Powell's commentary on softening labor data, recent benign inflation prints, and the potential impact of tariffs. While the market currently prices in a rate cut by September, economists diverge in their outlooks; Bank of America suggests the Fed might not cut rates at all in 2024 or make only one reduction, and Goldman Sachs also anticipates one cut despite forecasting the Fed will stick to its two-cut projection for now. The decision-making context is complicated by an unemployment rate at 4.2%, a gradual softening in the May nonfarm payrolls, and inflation data that has so far shown minimal impact from tariffs on a macro scale. Geopolitical factors, including Middle East turmoil and President Trump's tariffs, alongside White House calls for easier monetary policy, add further layers of complexity. Goldman Sachs projects the FOMC might raise its 2024 inflation expectation to 3%, up 0.2 percentage points from March, lower its GDP growth forecast to 1.5% from 1.7%, and see unemployment rise to 4.5%. The consensus, as highlighted by Evercore ISI, is that the Fed will use the summer to assess incoming data, with September remaining the next critical decision point for rates.

Key Decisions for Investors

• Investors should closely scrutinize the FOMC's updated economic projections, particularly the 'dot plot' for individual members' rate expectations, as a shift by just two participants could alter the median forecast from the current two rate cuts indicated in March.
• Given the divergence in economist outlooks, with Bank of America and Goldman Sachs anticipating fewer cuts than the Fed's March median, investors should monitor Chair Powell's statements on labor market softness, inflation trends, and the risks of tariff-driven inflation to gauge potential policy shifts.
• Consider portfolio adjustments based on updated FOMC projections for inflation (Goldman Sachs anticipates a rise to 3% for 2024), GDP growth (Goldman sees a slight lowering to 1.5%), and unemployment (Goldman expects a tick higher to 4.5%), as these will influence market sentiment and asset pricing.
• Maintain awareness of geopolitical risks, such as Middle East tensions and the evolving impact of tariffs, as these variables could significantly alter the economic landscape and Fed policy, potentially leading to increased market volatility around the September decision point.