The Federal Reserve is poised to announce its next policy decision on Wednesday evening and all signs point to it holding steady at 5.25-5.50 per cent, where it has lingered for almost a year.
Despite this stability, there is growing speculation about when the Fed might begin easing its policy. The Federal Open Market Committee (FOMC) is likely still wary about the inflation outlook to make a decisive move now although a September start to rate cuts seems plausible, according to economists at Investec.
The Fed’s updated ‘dot plot’ will be crucial to revealing FOMC members’ views on future rates. The last dot plot from March indicated three rate cuts this year.
However, with stubborn inflation and strong payroll data, the update may reflect a more cautious outlook, possibly indicating two cuts instead. Any shift to a single cut, as suggested by Atlanta Fed President Raphael Bostic in April, could boost the dollar sharply.
Attention will also be on Fed chair Jerome Powell’s press conference, where he is expected to address the US economy’s resilience and policy divergence with other central banks that have begun lowering rates.
In the UK, economic data releases will take the spotlight. Job market figures on Tuesday and April’s monthly GDP on Wednesday are key for the Bank of England as it navigates its rate policy amid political uncertainties ahead of the upcoming general election. These data points are likely to influence post-election monetary policy decisions.
Nigel Farage’s entry into the parliamentary race and the potential publication of party manifestos could impact market sentiments. “The limited fiscal room for manoeuvre and pledges to keep the major tax rates on hold could limit the scope for this,” Investec economists said.
Markets will also closely watch Consumer Prices Index (CPI) figures in the US, released just hours before the Fed’s announcement.