US Federal Reserve officials are set to wrap up their latest two-day policy meeting later on Wednesday (ET), featuring a fresh statement and insights from Federal Reserve Chair Jerome Powell, as per a Reuters report. These could shed light on how recent disappointing inflation figures have impacted expectations for interest rate adjustments this year. It's widely anticipated that the Fed will maintain its benchmark overnight interest rate, with investors assigning nearly a 100 per cent probability to this outcome. There's little support for any alterations to the policy rate from officials leading up to the meeting. However, the new policy statement scheduled for release at 2 p.m. EDT (1800 GMT), along with Powell's subsequent press conference, are poised to offer clarity on whether the recent inflation setbacks have influenced the likelihood of near-term interest rate cuts. Given that Fed policymakers won't be updating their quarterly economic projections at this meeting, any fresh guidance will rely on the statement and Powell's remarks. The Fed had made significant progress in reining in inflation back to its 2 per cent target after it surged to a 40-year high in 2022. However, progress has slowed this year, prompting central bank officials to downplay expectations of imminent rate cuts. As the latest Fed meeting commenced on Tuesday, two key sets of data further undermined the outlook. The Employment Cost Index (ECI), a crucial gauge of labour market conditions, rose at a 4.2 per cent rate year-over-year (YoY) in the first quarter, matching the fourth-quarter increase and surpassing levels considered consistent with the Fed's inflation target. Additionally, two national measures of home prices unexpectedly showed strength, challenging longstanding Fed hopes for a cooling in shelter inflation to help lower the headline inflation rate. Tuan Nguyen, a US economist at RSM, noted that recent data hasn't aligned with the Fed's expectations. He suggested that the ECI, in particular, could nudge policymakers towards a more hawkish stance on recent data, which they still hope will prove to be a temporary setback rather than a sign of stagnation in progress towards lower inflation. Investors in contracts linked to the Fed's policy rate adjusted their expectations in response to the data, delaying projections of a rate cut further into the future. According to data from CME Group's FedWatch Tool, the probability of an initial quarter-percentage-point reduction at the central bank's Sept. 17-18 meeting was roughly even as of Tuesday. The likelihood of no cuts to the benchmark rate at all within the current 5.25-5.50 per cent range this year rose to about one in four, up from close to zero in early April. The Fed last raised rates in July, and while officials have signaled reluctance to hike again, Powell's evaluation of this issue at his press conference will be pivotal. Even if it's merely to reaffirm the expectation of maintaining the current policy rate for longer than initially anticipated. In his last public comments on April 16, Powell acknowledged that recent data hasn't instilled greater confidence. He indicated that achieving such confidence and proceeding with rate cuts might take longer than anticipated, emphasiing the need to allow restrictive policy more time to take effect, given the strength of the labor market and progress on inflation so far.
