Fed likely to keep rates unchanged as May CPI hits 4.2%

The Federal Reserve is projected to maintain the federal funds rate at its current 3.5%-3.75% target range following this week’s policy meeting, as the consumer price index rose to 4.2% in May, the highest reading since April 2023. The increase follows higher energy prices linked to the conflict in Iran, pushing key inflation measures further from the Fed’s 2% goal.

Market pricing, reflected in the CME FedWatch tool, shows a 98.4% chance that the rate will remain unchanged, and a 42.7% probability that it will stay at that level through the December meeting, slightly ahead of a potential 25-basis-point cut.

Newly appointed Chair Kevin Warsh will hold his first post-meeting press conference, drawing attention to how the committee views the economic outlook. EY-Parthenon chief economist Gregory Daco noted, "> While Warsh is generally perceived as dovish, he will inherit a Committee that has become noticeably more hawkish."

JPMorgan economists, led by Michael Feroli, argued that the FOMC should remove any easing bias from its statement, suggesting a neutral tone or no forward guidance given the inflation backdrop and a still-strong labor market.

Analysts also expect close scrutiny of the Fed’s Summary of Economic Projections (SEP) and the “dot plot.” Daco said Warsh has expressed skepticism about the usefulness of such forecasts and might decline to submit his own projections, a move that would be largely symbolic but would underscore a shift toward data-driven decision-making.

Goldman Sachs economists Jan Hatzius and David Mericle indicated that recent reviews of the Fed’s communication framework have not produced major changes, and they do not anticipate significant alterations to the SEP in the near term.

Overall, the market views the prospect of rate cuts this year as limited, with policymakers signaling a willingness to keep tightening options on the table if inflation remains above target.