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The Federal Reserve will probably keep interest rates on hold Wednesday, with investors focused on board members’ rate expectations — the so-called dot plot — and on the central bank’s revised economic forecasts, observers said. Chair Jerome Powell’s comments will also be scrutinized.
While the governors are set to keep the key rate at 4.5%, they may opt to pause — or signal a possible pause in May of — quantitative tightening (QT), the sale of financial assets from its balance sheet, economists said.
The U.S. economy is definitely softening, but economists are divided as to the direction of inflation and policy, with some projecting three cuts starting as soon as the current meeting — which would be a surprise — and others seeing policymakers staying put for longer as prices remain sticky.
The economic projections and “distribution of risks are both likely to reflect stagflation: weaker growth and higher inflation,” with the dot plot still showing two rate cuts this year and next, Bank of America (BAC-0.36%) economists wrote in a note to clients.
Jefferies (JEF-0.94%) also expects weaker economic forecasts and modestly lower dots — and takes Powell and other Fed officials at their word when they say they’re “in no hurry” to cut rates again and can wait for further data before acting. The Trump administration’s tariff plans and other changes have added uncertainty.
Choppy data makes forecasting difficult. Inflation slowed by more than expected last month, but that may have hidden an unpleasant surprise in the form of stalled progress. Jobs numbers have been mixed, but retail sales and industrial production have held up while business sentiment craters.
“We anticipate Powell will continue to suggest that the economy is in decent shape and does not require additional monetary policy support,” Yardeni Research wrote in a note to clients. “However, he’s likely to maintain the Fed’s dovish bias to lower interest rates if the labor market cools significantly.”