La Française: The path to rate cuts is narrowing

April 30, 2024

The Federal Open Market Committee (FOMC) is widely expected to maintain the federal funds target rate steady at its May meeting.

Federal Reserve (Fed) Chair Powell will indicate that as long as the economy remains resilient, the Fed can take time to assess the path of inflation and ensure that it returns sustainably to its 2% target. Consequently, the FOMC will hold its restrictive stance for longer than previously thought without ruling out any hawkish decisions if necessary, even if it is not its baseline scenario.

Please find below what we expect:

• The Federal Reserve is leaving interest rates unchanged at a target range of 5.25% to 5.50%.
• Fed Chair Powell will indicate that the policy stance is appropriate given the US's continued economic strength combined with higher-than-expected inflation.
• Mr. Powell is likely to signal that the US central bank will envision fewer interest rate cuts this year than the three cuts projected by the largest share of Fed officials in March. Consequently, he will underline that the number, timing, and frequency will depend on inflation data and the labor market.
• The Fed is expected to confirm its plan regarding the future of their balance sheet winddown by cutting the Treasury cap from $60 billion to $30 billion per month, likely in June.

In summary, the Fed should respond with a more hawkish stance to the unexpectedly strong inflation data in March for the third straight month. This context will constrain the FOMC to take a wait-and-see approach, consequently postponing the start of the easing cycle. We believe this committee is going to focus on how long U.S. interest rates will stay high and the possibility of another interest rate hike, which could push U.S. interest rates higher and result in a stronger dollar.