As we gear up for the next Federal Open Market Committee (FOMC) meeting, there’s a lot of anticipation surrounding the release of the Summary of Economic Projections (SEP). This document provides crucial insights into the Federal Reserve’s outlook on economic growth, inflation, and the future path of interest rates. Given the latest economic data, including a surprisingly low Core CPI increase for May, the upcoming SEP release is poised to be particularly significant.

May Core CPI: A Softer Inflation Print

In May, the Core Consumer Price Index (CPI), which excludes volatile food and energy prices, recorded a modest increase of 0.16%. This was below both UBS’s forecast of 0.24% and the broader consensus expectation of 0.3%. This lower-than-expected inflation figure has added a new layer of complexity to the economic outlook and the potential policy decisions by the FOMC.

However, not all components of inflation showed signs of moderation. Owners’ Equivalent Rent (OER), a key driver of the housing component of CPI, increased by 0.43% in May, not decelerating as much as many had hoped. The persistent rise in OER suggests that inflationary pressures in the housing market remain a concern, complicating the overall inflation narrative.

Projections for Rate Cuts in 2024

With the SEP on the horizon, our focus shifts to what the FOMC’s median assessment might be for appropriate policy in 2024. Based on our analysis, we anticipate the SEP will reflect a median forecast of two 25 basis point (bp) rate cuts next year. This projection aligns with the view that the Fed might aim for a more accommodative stance to support economic growth and ensure inflation moves toward its target range.

But what if our projection is off? If the SEP instead shows only one 25 bp rate cut for 2024, it would signal that the FOMC is likely to maintain its current policy stance for the next few meetings. Such a decision would imply that the Fed is waiting for more concrete signs of economic softness or further disinflationary pressures before deciding on further rate cuts, possibly deferring any changes until the December meeting.

The Importance of the SEP and “Dot Plots”

The SEP includes a crucial component known as the “dot plot,” which illustrates the individual FOMC members’ expectations for future interest rates. These projections can provide valuable insight into the central bank’s economic outlook and policy intentions.

Given the recent data and the ongoing economic uncertainties, we anticipate that the FOMC participants may take additional time to reconsider their projections. Typically, the deadline for revising the SEP submissions is 9 am on the second day of the meeting. However, we expect this deadline might be extended to allow participants to fully digest the latest CPI data and other economic developments, ensuring that their projections accurately reflect their current outlook.

Looking Ahead

As we await the FOMC meeting and the release of the SEP, the key takeaway is that the path of monetary policy remains data-dependent. The lower-than-expected Core CPI print for May has opened the door for potential rate cuts in 2024, but the persistent rise in OER highlights the challenges the Fed faces in managing inflation.

Whether the FOMC decides on one or two rate cuts next year, the forthcoming SEP will provide critical guidance for financial markets and the broader economy. The Fed’s decisions in the coming months will be crucial in shaping the economic landscape and ensuring a balanced approach to achieving its dual mandate of maximum employment and stable prices.