US Fed policy: 5 factors that will influence the decision

Experts say the US Fed is expected to keep its benchmark rate steady at 5.25-5.50%

The US Federal Reserve is unlikely to cut rates in June due to persistent inflation, with Fed’s Chair Jerome Powell potentially signaling a rate cut cycle timeline at the upcoming meeting, Mint reported.

Federal Reserve Bank Chairman Jerome Powell (Getty Images via AFP)

Experts say the Fed is widely expected to keep its benchmark rate steady at 5.25-5.50%, a 23-year high, as the decline in inflation has not met the Fed's expectations, according to the report.

“The June 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,” Amit Goel, Co-Founder & Chief Global Strategist at Pace 360 told Mint. “The new dot plot likely will indicate two 25-basis-point cuts this year, compared with three in the March version.”

Last week, the Labor Department's latest employment report showed that the US created more jobs than expected in May, with annual wage growth accelerating.

According to a Reuters report, US non-farm 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 by 0.4% after slowing to a 0.2% rate in April. Wages increased 4.1% in the 12 months through May, following an upwardly revised 4% annual rise the prior month. Wage growth in a 3-3.5% range is seen as consistent with the Fed's 2% inflation target," reported Reuters.

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

2. Growth indicators

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

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

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% target, making it tough for the US Fed to tweak its monetary policy.

In April, the US personal consumption expenditures (PCE) index rose 0.3%. On a yearly basis, the PCE price index remained stable, rising 2.7% 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, which will be a crucial indicator for the Fed’s decision.

4. Geopolitical scenario

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

5. The Markets

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.