The US Federal Reserve is headed towards maintaining interest rates during its upcoming meeting next week, as investors' expectations regarding monetary policy trends increase amid mixed economic data and ongoing geopolitical and trade risks.
Recent inflation readings that were lower than expected, along with a slowdown in job growth, have supported bets on a resumption of interest rate cuts soon, despite President Donald Trump's call for an immediate full percentage point cut.
While investors expect a gradual rate cut, current estimates indicate the likelihood of two cuts by the US Federal Reserve this year, with some forecasts leaning towards a third cut if the weakness in economic activity continues. Despite holding the unemployment rate at 4.2%, indicators of slowing demand and declining momentum in retail sales raise concerns among policymakers, who seek to achieve a delicate balance between containing inflation and supporting growth.
Concerns related to trade policies, especially the tariffs that Trump reinstated since taking office, continue to affect the US Federal Reserve's outlook. Officials fear that these tariffs could lead to higher import costs, negatively impacting prices and growth. However, these effects have not yet clearly appeared in the data, reinforcing the logic of waiting to make new decisions until the actual impact on the economy becomes clearer.
On the other hand, updated forecasts suggest that the US Federal Reserve may head for a single cut this year, driven by a slowdown in inflation, but it will remain cautious due to the ongoing uncertainty weighing on businesses and households. Futures contracts in the markets show that the likelihood of an interest rate cut has become more probable following recent inflation data, while some economists see the path clear for a gradual cut starting in September and continuing until 2026, driven by declining domestic demand.
Citi analysts believe that tariffs may lead to a limited increase in the prices of some goods, but the deep slowdown in core services inflation will make this effect temporary. They added that markets have not yet absorbed that weaker demand will lead to lower inflation and higher unemployment, paving the way for a monetary easing cycle faster than many expect.
In this cloudy picture, attention turns to the anticipated retail sales report for May, which will be released ahead of the upcoming US Federal Reserve meeting and may carry crucial indicators regarding the path of monetary policy in the upcoming period.