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Jun 07 - 02:55 PM

Danske: June FOMC Meeting Expectations and Market Implications

By eFXdata  —  Jun 07 - 01:15 PM

Synopsis:

Danske provides their outlook on the upcoming June FOMC meeting, predicting that the Federal Reserve will maintain its current monetary policy stance. They expect the Fed to signal fewer rate cuts for the year, accompanied by cautious communication from Chair Powell. The focus remains on the economic data and its impact on future policy decisions.

Key Points:

  1. Monetary Policy Stance:

    • Danske anticipates the Fed will keep its monetary policy unchanged at the June meeting, aligning with consensus and market expectations.
    • The updated dot plot is expected to signal two rate cuts for the year, down from the previous projection of three cuts.
    • Growth, unemployment, and inflation forecasts are likely to see only minor adjustments.
  2. Powell's Communication:

    • Chair Powell is expected to maintain a cautious tone, signaling no immediate urgency to alter the Fed's current policy stance.
    • Despite the Fed's bias towards rate cuts, Powell's communication is anticipated to lean towards a dovish market reaction over the course of the day.
  3. Economic Data Context:

    • US economic data continues to indicate cooling, with May PMIs and ISM showing weakening industrial order-inventory balances and moderating labor demand.
    • Bank lending growth has stabilized below pre-pandemic levels, reflecting the impact of tight monetary policy.
    • Europe, in contrast, has shown signs of rebounding manufacturing activity.
  4. Updated Projections:

    • The 2024 median dot in the Fed’s rate projections is likely to shift 25bp higher, indicating two rate cuts instead of three.
    • GDP and unemployment forecasts will likely see minimal revisions, with downside risks to growth and upside risks to unemployment noted.
    • Inflation forecasts are expected to remain mostly unchanged despite faster-than-expected PCE inflation in Q1, as recent data shows cooling momentum.
  5. Market Implications:

    • Powell is expected to downplay speculation about further rate hikes, emphasizing that current interest rates are sufficiently restrictive.
    • Sticky inflation may delay rate cuts, but the overall dovish tone could signal a market-friendly outcome.

Conclusion:

Danske expects the Fed to hold its current monetary policy stance at the June FOMC meeting, signaling a cautious approach with fewer rate cuts projected for the year. Chair Powell's communication will likely emphasize patience and caution, reinforcing the Fed's readiness to adapt to incoming economic data. This approach is anticipated to produce a mildly dovish market reaction, aligning with the broader cooling trend in US economic data.

Source:
Danske Research/Market Commentary

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