• The day’s news is a double-whammy. It starts with the crucial reading of the consumer price index for May in the morning, and concludes with the policy meeting of the Fed in the afternoon.
  • The CPI is expected to rise by just 0.1% from April. However, this would still equate to a 3.4% annual increase. Core PCI will show a 0.3% gain per month and 3.5% on an annual basis.
  • The Fed won’t do anything about interest rates. Officials will provide a variety economic forecasting updates, including the much-watched central bank “dot chart” of interest rates expectations.

(Photo by Celal Gunes/Anadolu via Getty Images) Jerome Powell, chairman of the U.S. Federal Reserve speaks at the conference celebrating 100 years of Division of Research and Statistics of the Board of Governors of Federal Reserve System on November 8, 2023 in Washington D.C. (Photo by Celal Güneş/Anadolu via Getty Images).
Celal Gunes | Anadolu | Getty Images

Wednesday will be a very important day for economic news. Investors will learn about the direction of the inflation, and how the Federal Reserve intends to respond.

The morning will start with the crucial reading of the consumer price index for May, and the afternoon meeting of the Fed will send vital signals about the direction the economy is taking and whether policymakers are able to take their foot off the pedal soon.

Jonathan Pingle, economist at UBS, wrote that the day “packs in months of macro-risk into one day”.

Pingle, like many on Wall Street expects that the CPI reading combined with last week’s surprisingly high nonfarm employment reading as well as other recent data releases will lead Fed officials to change their outlooks for inflation, economic expansion and interest rates.

The optimists hope that the moves will be within the expected range and won’t cause the market participants to lose their nerves.

Jack Janasiewicz is the lead portfolio strategist for Natixis Investment Managers. He said, “We expect both releases to have a relatively benign outcome, despite their history of market moving events.”

Here are the broad outcomes that we expect for both events.

CPI inflation

It is expected that the measure of what a basket of goods and service costs consumers in May will show very little movement month-to-month — only a 0.1% rise from April. However, this would still equate to a 3.4% annual increase.

The core PCI, which excludes food and energy costs, is expected to rise by 0.3% per month and 3.5% annually.

These numbers do not show a significant change from April’s readings. They still indicate that inflation is running above the Fed target of 2%. Some economists believe that by looking at the details of important metrics like insurance costs and core service prices excluding housing, inflation is at least trending in the correct direction.

Janasiewicz stated that “on the inflation front expect more of what you’ve seen so far – evidence that the disinflationary trends are still intact, and that the first quarter data were simply a pause within a downward trend.”

A few things to note about the CPI. While it’s a popular metric for investors and the general public, the Fed does not use it as its primary metric. Central bankers prefer to use the Commerce Department’s measure of personal expenditures prices. This is a more comprehensive measure that takes into account changes in consumer behaviour.

The Bureau of Labor Statistics will release its CPI report on Wednesday at 8:30 am ET. ET on Wednesday.

The Fed Meeting

The Federal Open Market Committee will finalize their projections of inflation, gross domestic products, and unemployment, as well as the path for rates through 2026.

The Fed will, first and foremost, do nothing when it comes time to set interest rates. Market pricing and policymakers’ rhetoric point to little chance of any change in interest rates. The central bank will keep its benchmark overnight lending rate between 5.25%-5.50 percent.

Markets will closely monitor the actions that officials take instead.

FOMC members are expected to release quarterly updates of their Summary of Economic Projections. This could be affected by the CPI Report. Meeting participants typically submit their estimates on Wednesday morning, but the 19 participants are usually given a bit of extra time to take into account incoming data.

In the informal market commentary, it is widely believed that the Fed will change the direction of its pivotal “dot plot” upward. This would have the impact that the grid will likely show fewer interest rate reductions than the three indicated in March for 2024. Most economists expect the path to show only two, but there are some who worry that the outlook may shrink to one.

UBS’ Pingle stated that if the Fed signals a cut, it is likely the Fed will not act until November or even December.

Goldman Sachs’ economists predict two rate cuts. The first is expected in September. Citigroup expects three possible rate cuts, while Bank of America is looking at one.

David Mericle, Goldman’s economist, wrote: “Our conviction is limited, because we still see cuts as an optional measure. The inflation news that we expect will make a cut decision reasonable, but not obvious. And FOMC participants hold a variety of opinions.”

Economists expect the Fed will also reduce its outlook on gross domestic product and increase the expected inflation from March’s projections.

The Fed’s post-meeting announcement and Chair Jerome Powell’s press conference are also important developments.

We do not anticipate any major changes in the FOMC statement, or the message of Chair Powell at the meeting on June. Powell’s May press conference was notable for his opposition to possible rate increases, but since then the markets have largely ceased to discuss them,” Mericle stated.

In fact, few Fed officials have in their public comments mentioned the possibility of further raising rates.

The market’s expectations have been drastically revised from the early 2024, when traders anticipated six cuts in this year.

Recent economic data, which will likely be confirmed by the CPI report on Wednesday, indicate an economy in flux, where rates are being treated as more likely to rise for longer. Payrolls data released on Friday showed that wages grew at a rate of 4.1% annually, which is higher than what the Fed wants to see.

Nicholas Colas wrote that the Fed’s unofficial wage target of 3.3 per cent is being stubbornly exceeded by a still-growing U.S. economic. It is difficult to imagine a path to anything other than a token Fed interest rate cut in 2024 unless economic growth slows.

Exclusives from CNBC PRO