As the Federal Reserve grapples with shifting trade policies and volatile markets, next week’s meeting of the Federal Open Market Committee will most likely be one of largely maintaining the status quo.
We expect the Fed to keep its policy rate in a range between 4.25% and 4.5%. We also do not expect any significant changes to the Summary of Economic Projections, but expect that the committee will reduce its forecast on interest rates to one cut this year.
Based on our own model and the central bank’s recent rhetoric, the Fed will be and should be in no hurry to cut rates given the risk around the economic outlook linked to inflation and trade policy.
Our model of the Fed’s reaction function implies that the policy rate should stand at 4.25% with a forward look implying one or two cuts this year.
But given the pervasive policy uncertainty, we lean toward one cut either in September or more likely in December because it will be some time before the Fed can ascertain the impact of trade policies on unemployment and inflation.
We expect the committee’s interest rate forecast, or the dot plot, to reflect a median projection of 4.125% for this year, up from 3.875%, suggesting a modest chance of a 25 basis-point cut this year.
Read more of RSM’s insights on the economy and the middle market.
Markets are pricing in a 68.6% probability of a rate cut in September and a 64.1% likelihood in December, based on the overnight index swaps. For next year, we anticipate the dot plot’s median projection to move up to 3.625%.
Spending and inflation data have held up well since sweeping new tariffs were announced on April 2. We expect the growth forecast to be revised down to 0.9% from 1.7% and the projection for median unemployment to remain at 4.4%.
The forecast for inflation is likely to be revised higher to 3% with the core rate, which excludes food and energy, to 3.2%.
But in our view, those conditions are likely to deteriorate with growth slowing and inflation increasing into the end of the year. The prospect of the Fed cutting its policy rate into a “stagflation lite” environment in June, July or September is quite low in our estimation.
With respect to the FOMC’s post-meeting statement, we anticipate the committee to slightly change its reference to the pace of the economy from “solid” to “moderate.”
We expect the labor market to be characterized as solid and inflation to continue to be characterized as somewhat elevated.
