Hello, friends! Today all eyes of the financial markets are on Washington, where another, and as always, extremely important meeting of the Federal Reserve System (FOMC) has started, which will last on May 6 and 7, 2025. What to expect from this gathering, what signals investors will look for, and what to be wary of? Let’s take a look at what leading analytical publications and experts are saying to form a general picture.
By sifting through reports from major banks, analytical agencies, and specialized financial media, several key points can be highlighted that define the background and expectations from this FOMC meeting.
Perhaps the most predictable item on the agenda is the decision on the key interest rate. Here, the market is almost unanimous: the FOMC rate is likely to remain unchanged in the current range of 4.25%-4.50%, which has been maintained since December of last year. And this is not just a guess, but an expectation built into market instruments like FOMC rate futures. Why such confidence? The arguments of analysts sound logical: on one hand, we see that the labor market in the U.S. is still quite strong – the latest employment data turned out better than expected. On the other hand, stubborn resistance to inflation falling to the FOMC's target level of 2% does not allow the regulator to rush. In such a situation, "holding the pause" seems the most reasonable step, allowing for the assessment of further data before making a decision to change course. An unexpected change in the rate now would be a real shock to the markets, as it does not align with the current consensus.
If the decision on the current rate raises almost no questions, then all the intrigue shifts to signals about future monetary policy, specifically when and how quickly the FOMC will begin to cut rates. Here, opinions among analysts diverge, and this is where the source of potential market volatility lies. The FOMC hinted in its March forecasts at two rate cuts of 25 bps by the end of 2025. The market had been more optimistic for a while, pricing in a greater number of cuts, although recently these expectations have somewhat subsided in light of strong economic data. On one hand, there is an opinion that some economic growth indicators are beginning to show a slowdown, and the potential negative impact of trade tensions could hit the economy harder than it seems now. This could serve as an argument for an imminent easing of policy. On the other hand, a strong labor market and risks of inflation remaining above the target provide the "hawks" within the FOMC grounds to postpone rate cuts. Experts believe that at the press conference, Fed Chair Jerome Powell will be extremely cautious in his wording, trying not to provide clear timelines, but may attempt to adjust market expectations if they differ significantly from the regulator’s views. Markets will literally cling to every word from Powell: any hints at an earlier or faster rate cut will trigger a rise in risk assets – equities, possibly cryptocurrencies – and weaken the dollar. Conversely, a tough tone and refusal to signal about imminent easing might provoke sell-offs in the stock markets and strengthen the U.S. currency.
In addition to the rate and future forecasts, market participants will pay attention to the FOMC's policy on reducing its balance sheet, known as quantitative tightening (QT). The FOMC has already announced a slowdown in the pace of QT starting in April, and it is unlikely that there will be a new decision on this matter at this meeting. However, any comments in the statement or at the press conference regarding future plans for balance sheet management will be significant for assessing the overall liquidity picture in the system. Analysts will also be looking for subtle changes in the wording of the FOMC’s statement itself, which may reveal changes in the sentiments or priorities of Committee members. Of course, the responses from Jerome Powell to sharp questions from journalists, including those about the impact of trade policy and political pressure, will also be of great importance.
Thus, the picture is as follows: the May FOMC meeting is primarily not about today’s decision on the rate, but about signals for the future. The FOMC is in a difficult position: a strong labor market and inflation risks do not allow it to signal directly about an imminent and aggressive rate-cutting cycle, while some data and external factors create arguments in favor of easing policy in the future. Powell is likely to stick to wording about data dependence, trying to maintain flexibility while attempting to adjust market expectations if they seem too "dovish". One should not expect a "dovish" surprise from this meeting; the tone will most likely be cautious. The main difficulties lie in the nuances of implementation and the process of making future decisions, as well as in the interpretation of economic data and responses to external challenges.
Summary:
In conclusion of our analytical review before the May FOMC meeting: the most likely decision is to keep the rate unchanged. All attention will be focused on the rhetoric of the FOMC and Jerome Powell regarding the timing and pace of future rate cuts. Given the conflicting incoming data and the presence of external risks, do not expect overly "dovish" signals. Markets will be extremely sensitive to any nuances in the statement and at the press conference on May 7. Be prepared to listen carefully and analyze, as the dynamics of financial markets in the coming months will largely depend on these signals.
Will the FOMC manage this juggling of factors? Share your thoughts in the comments!