Commentary: FOMC meeting ahead
On Wednesday, the US Federal Reserve will meet to make May’s interest rate decision. As of now, the Fed funds rate range is 4.75%-5.0%. Markets are now pricing an 85% probability of 25bps hike and a 15% probability of no rate change. In mid-March the probability of hike stood at 21%.
Federal Reserve has a two-fold problem to solve. On the one side, it has to tame inflation which, despite retreating in recent months, is still far from the target level of 2%. On the other side, the Fed has to make sure that the economic activity does not weaken to an extent that the US enters a recession (i.e., a hard-landing scenario).
While the cracks are observed in the US economy, overall, it has displayed resiliency. Last week, the 1Q23 GDP came in below expectations but still grew by 1.1% q/q. Moreover, while housing market continues to weaken and business investment shows significant slowdown, American consumers exhibit strong willingness to spend, as consumption grew by impressive 3.7% q/q. This is partly explained by a strong labor market which is yet to be impacted by the tightened monetary conditions. In past 12 months, the monthly non-farm payrolls averaged a quite strong c.320,000. Importantly, the April figure, which is due Friday this week, is expected to stand at a more modest level of 180,000.
Overall, for the Fed to begin rate cuts either inflation has to show further deceleration or economic conditions need to deteriorate significantly. With headline (core) inflation at 5.0% y/y (5.6% y/y) and resilient economic activity, Fed pivot is unlikely for now.
