Please find below a new comment from Frederik Ducrozet, Head of Macroeconomic Research, at Pictet Wealth Management, ahead of tomorrow’s Fed meeting.
- The policy rate should remain on hold. However, the Federal Reserve is expected to downgrade its 2025 GDP growth forecast, raise inflation projections, and acknowledge increased uncertainty. The policy statement may reflect a slowdown in economic activity.
- The dot plot is anticipated to show an unchanged median projection of two rate cuts this year, with risks skewed towards one cut.
- Chair Powell is likely to signal that the Federal Reserve is not in a rush to make changes. The Fed may hold or cut rates if growth or the labour market deteriorates. Amid market concerns about a recession, Powell could be patient in addressing rate cut pricing.
- There should be no change to quantitative tightening, though it will likely be a topic of significant discussion. A risk scenario involves a pause or slowdown in quantitative tightening, with an announcement potentially expected in May or June.
- We anticipate one rate cut in June and no further cuts in the second half of the year due to re-accelerating inflation. In a scenario where growth slows, similar to our new base case, markets might be underpricing inflation threats and the extent to which the Fed would prioritise its inflation mandate. The 2019 insurance cuts, prompted by the trade war, were initiated with below-target inflation and low inflation expectations.
- However, if the growth slowdown evolves into a precursor to recession, the Fed might prioritise the employment mandate, potentially leading to faster and deeper cuts than markets anticipate.
