US Fed policy today: From job market trends to macro indicators- 5 crucial factors that will dominate Fed’s mind

There are no expectations of a rate cut from the US Federal Reserve in its June policy meeting. The US central bank’s policy-setting committee, the Federal Open Market Committee (FOMC), will announce its policy decision on Wednesday, June 12, after a two-day meeting.

Persistent inflation and a robust economy have been the primary drivers of the US’s sustained high interest rate environment.

Experts say the Fed is widely expected to keep its benchmark rate steady at 5.25-5.50 per cent, a 23-year high, this time, as the decline in inflation has not met the Fed’s expectations.

However, the June policy meeting is important as Fed Chair Jerome Powell is expected to offer signals on the timeline for the rate cut cycle.

“The June FOMC meeting will be one of the most pivotal events this year as Federal Reserve Chair Jerome Powell may provide the clearest hint about the rate-cut timetable. The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version,” said Amit Goel, Co-Founder & Chief Global Strategist at Pace 360.

Also Read: US Fed meeting this week: When will the US central bank cut benchmark interest rates? Experts weigh in

Let’s take a look at five crucial factors that will influence the Fed’s policy decision on Wednesday:

1. Tight jobs market

Last week, the Labor Department’s latest employment report showed that the world’s largest economy created more jobs than expected in May while annual wage growth accelerated.

According to a Reuters report, Us nonfarm payrolls increased by 272,000 jobs, while the government payrolls increased by 43,000 positions in May. Professional and business services hired 32,000 more workers.

“Average hourly earnings rose 0.4 per cent after slowing to a 0.2 per cent rate in April. Wages increased 4.1 per cent in the 12 months through May, following an upwardly revised 4 per cent annual rise the prior month. Wage growth in a 3-3.5 per cent range is seen as consistent with the Fed’s 2 per cent inflation target,” reported Reuters.

However, data also showed that the unemployment rate rose to 4 per cent in May from 3.9 per cent in April.

Also Read: Citi Now Expects First Fed Rate Cut in September, Not July

2. Growth indicators

The US economy remains strong, defying recession forecasts. This indicates that the US economy is well-placed to grow at a healthy pace this year.

On Tuesday, the World Bank raised its 2024 global growth outlook due to the strong US economy.

According to a Reuters report, the World Bank expects the global economy to stabilise at 2.6 per cent in 2024, unchanged from 2023, and up 0.2 percentage point from the World Bank’s January forecast.

The World Bank is now forecasting 2.5 per cent US growth for 2024 – matching the 2023 pace – and up sharply from the January forecast of 1.6 per cent.

Strong growth indicators indicate the Fed may keep rates higher for a longer period unless it is convinced that elevated interest rates exert significant pressure on the economy.

3. Inflation trend

Inflation remains above the Fed’s 2 per cent target amid tight jobs market and resilient economy, making it tough for the US Fed to tweak its monetary policy.

In April, the US personal consumption expenditures (PCE) index rose 0.3 per cent. On a yearly basis, the PCE price index remained stable, rising 2.7 per cent after increasing at the same pace in March. The PCE price index is one of the key inflation measures the US Fed tracks.

Additionally, the US Labor Department is set to release May’s Consumer Price Index (CPI) data on Wednesday. This report will be a crucial indicator for determining whether the Federal Reserve will consider cutting interest rates soon.

Also Read: US Fed Policy: Powell-led FOMC to hold status quo on rates over diverging trends in labour market; core CPI eyed

4. Geopolitical scenario

The Fed will keep in mind that the Russia-Ukraine war and conflict in West Asia persist. Any escalation of tension in the West Ais region will potentially shoot up crude oil prices, dealing a blow to the fight against inflation.

5. Market mood

The US 10-year bond yields declined Tuesday as investors awaited key inflation data and the Federal Reserve policy outcome.

Stronger-than-expected payroll data and fading hopes of rate cuts have recently kept bond yields high. The US Fed will keep a close eye on bond yields as they are crucial indicators of the mood of the market.

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