US | Fed set to drop easing bias as inflation returns to top priority

Summary

The FOMC will most likely keep the fed funds target range unchanged at 3.50-3.75% and shift to a more two-sided approach to future policy guidance. The case for maintaining an easing bias has weakened materially as labor market downside risks appear to have diminished, while inflation progress has become less convincing.

Key points

• Key points:
• The US economy remains broadly resilient, with private-sector demand growing at a 2.4% pace in 1Q despite higher energy prices and lingering geopolitical uncertainty.
• Concerns about downside risks to the labor market have eased, reducing one of the key motivations behind the Fed’s rate cuts last year.
• Still-elevated core PCE inflation is likely to convince most participants that inflation has not made sufficient progress, reinforcing the case for two-way guidance.
• The April FOMC minutes revealed a Committee increasingly focused on upside inflation risks and less concerned about downside labor market risks.
• The meeting will also provide the first indication of how Chair Warsh intends to balance his policy preferences with the need to preserve institutional confidence.

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