Fed set to hold rates this week – but markets will look for clues on cuts

Fears that the US Federal Reserve will be forced to hold interest rates at their current level for longer than expected will weigh on traders’ minds ahead of the latest rate decision this week.

The Fed is almost certain to leave rates on hold when it announces its decision on Wednesday, but markets will be paying close attention to the central bank’s forward guidance.

At the beginning of the year, traders thought the Fed would rapidly unwind its historic bout of interest rate rises with as many as six interest rate cuts expected throughout 2024. Hot inflation and continued strong growth has dampened these bets, with some economists suggesting the Fed will wait until 2025 to cut interest rates.

“A hotter-than-expected CPI inflation print, combined with another strong nonfarm payroll out-turn seems to have contributed to a degree of nervousness among both financial markets and committee members that interest rate cuts may be further away than first envisaged,” Ellie Henderson, an economist at Investec said.

Fed chair Jerome Powell recently acknowledged the risk that inflation may prove to be persistent. “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” he said.

Inflation has come in ahead of expectations for three months in a row, with March’s consumer price index showing a slight acceleration in price pressures. The headline rate of inflation climbed to 3.5 per cent.

New figures released on Friday also showed that underlying inflation – measured by the core personal consumption expenditure index – rose 0.3 per cent last month, bringing the annual rate of inflation to 2.8 per cent.

The economy continues to add jobs at a startling pace too. The latest nonfarm payrolls report showed that 303,000 jobs were created in March, well above the 200,000 expected by economists. Unemployment also edged lower.

“The conversation has changed from not just if we will get an easing at the next meeting, but if there is an interest rate reduction this year at all,” Henderson said.

Looking beyond the Fed, earnings season will continue with results from tech giants Amazon and Apple. In the UK markets will be paying close attention to results from HSBC and Shell.

In Europe, ‘flash’ inflation figures for April will be published on Tuesday alongside GDP numbers for the first quarter. Economists expect inflation to remain at 2.4 per cent while growth will be marginal at best at 0.2 per cent