Market Anticipates Steady Fed Rates Amid Inflation Uncertainties

While U.S. inflation and the Federal Reserve’s interest rate decisions are closely related, they can impact the market with varying intensity. The Federal Reserve aims to avoid surprising the market, whereas inflation is inherently unpredictable. As a result, the market is confident that the Fed will neither hike nor cut rates at the upcoming meeting. However, inflation forecasts are often inaccurate. According to TradingEconomics, U.S. inflation year-over-year is forecast to have stalled at 3.4%.

Stability of PCE Index and Rate Cut Speculations

Last week, the personal consumption expenditures (PCE) price index remained steady at 2.8% in April for the second month in a row. This stability suggests that inflation may persist longer than expected, raising doubts about how soon the Fed can cut interest rates. Currently, traders see a 68% chance that the Fed will cut rates in September, as reported by Reuters.

ECB and Global Rate Cuts

In contrast to the Fed’s stance, the European Central Bank (ECB) announced today a 0.25 percentage point cut in borrowing rates for the eurozone, the first decrease since 2019. The ECB’s main refinancing rate is now 4.25%, down from a record high of 4.50%. This rate reduction follows similar moves by the Swiss National Bank, Sweden’s Riksbank, and the Bank of Canada.