Xiao Cui, Senior Economist, Pictet Wealth Management.
- We expect the Fed to keep rates unchanged at 3.5-3.75% on Wednesday. Governor Miran and Waller are likely to dissent in favor of a cut, with a possible third dovish dissent from Governor Bowman.
- The policy statement is likely to acknowledge risks to both sides of the mandate from the conflict in Iran. The updated dot plot should remain largely unchanged, with the median indicating one rate cut in 2026 and one cut in 2027, and the median long-run neutral rate remaining at 3%. We expect some officials penciled in fewer cuts due to inflationary concerns while others put in more cuts given recent labor market data. The Summary of Economic Projections is likely to show higher headline and core inflation, lower growth, and higher unemployment.
- The hawkish risk for the meeting would be if the dot plot indicates a median of zero rate cut, or if Chair Powell raises the possibility of rate hikes should tariff- or oil-driven inflation persist.
- Recent core PCE data have been running high, and the oil shock is likely to delay the expected disinflation that’s supposed to start in the middle of the year. The sharp weakness in the most recent employment report, despite some caveats, likely renewed labor market concerns.
- Given near-term risks to inflation from the Iran conflict and limited drag to growth under robust macroeconomic performance so far, the risks are tilted towards a delay in our expected rate cuts in June and September. But we maintain our view of an easing bias from the Fed this year and think persistent concerns abot labor market weakness warrant a more dovish outlook than what the market is currently pricing.
