The US Federal Reserve, which meets on Tuesday and Wednesday, May 6 and 7, and will announce the results of its meeting at the end of the US session on Wednesday, is dominating this week’s events. The bank is expected to keep interest rates unchanged at 4.5% for the third consecutive meeting this year, following a quarter-basis-point cut in December.
The latest inflation reading for March, released on April 10, fell short of expectations, rising to 2.4% from 2.8%, while the annual core index rose to 2.8% from 3.1%, marking the lowest growth rate since March 2021.
Conversely, the Consumer Price Index (CPI), which excludes food and energy prices and is closely monitored by the US Federal Reserve, rose 2.6% in March, compared to 2.8% in February.
The latest labor market figures released last Friday were positive, with the economy adding approximately 177,000 jobs in April, and wages holding steady at 3.8% on an annual basis, the same as March’s reading. These figures reflect market expectations that the US Federal Reserve may have no reason to cut interest rates at its meeting on Wednesday, despite the slowdown in economic growth in the first quarter. However, most economic figures have remained resilient, and the impact of the tariffs announced by Trump on what became known as “Freedom Day” in early April has not yet been felt.
The impact of the tariffs on inflation and the labor market is expected to begin in May, and markets will therefore monitor any indication from the Federal Reserve regarding the timing of its first interest rate cut this year. According to the CME’s FedWatch tool, markets are pricing in approximately 33% of expectations for a 25 basis point cut at the June meeting, and more than 80% of expectations for a 100 basis point cut by the end of the year.
The US Federal Reserve will be under pressure from statements by US President Trump, who has repeatedly attacked the central bank’s president, calling for him to take proactive steps to cut interest rates. This has increased market uncertainty and cast doubt on the bank’s credibility, before Trump backtracked, saying he has no intention of dismissing the central bank president. Will Trump’s statements have any impact on the bank’s decision? This is what we will witness at Wednesday’s meeting. Markets will be watching for any indications from the Fed regarding future interest rate cuts to support the economy amid the trade war and recession fears. Balancing the need to support the economy with concerns about the inflationary impact of tariffs will be the most difficult task the Fed will face in the coming period.